Trouble for B&M as millions wiped off value despite huge pay day
Despite reporting increased sales and a huge dividend of more than £150m, shares in B&M plunged in the aftermath of its latest trading update last week.
Shares in the Liverpool-headquartered discount retailer slumped from 360p to 316p following the publication of its third quarter results.
B&M’s price has hardly recovered in the days since, with its shares now trading at a value not seen since towards the end of 2022.
But the sharp drop was the continuation of a longer downward trend for the retailer’s share price which has been declining steadily since May 2024 when it commanded a price of 548p per share.
The prolonged share price drop means that all the value B&M generated over a near two-year period has now been almost wiped out.
At first glance, the reaction of investors following B&M’s latest financial update seems counterintuitive.
The retailer’s revenue grew by 3.5 per cent in the three quarters to 28 December and 2.8 per cent in the last three months of 2024 alone.
It also reported a special dividend of £151m, a move which is always sure to please shareholders.
However, B&M did narrow its profit growth guidance range to a group adjusted EBITDA [earnings before interest, taxes, depreciation, and amortisation] of between £620m to £650m.
It also added that its group adjusted operating profit is now forecast to be between £590m to £620m.
What is behind the drop in B&M’s share price?
According to Orwa Mohamed, a senior analyst at Third Bridge, the negative market reaction to B&M’s recent business update “took many by surprise”.
He said: “In many ways the dip talks to some broader themes in retail that B&M finds itself on the wrong side of.
“Our experts note that as the cost-of-living continues to bite following the 2024’s Autumn Budget and its ongoing economic fallout, the UK value retail market is heating up.
“Major supermarkets are competing for this market as never before with price-matching schemes meanwhile other discount chains are expanding their networks of stores rapidly.
“This signals a tougher trading environment for B&M and, against this backdrop, while a 2.8 per cent sales boost is to be welcomed, more might have been expected, especially over the high-value festive season.”
Is automation the key?
Mohamed added that B&M’s strategy “thus far has been fairly low-tech compared to much of the rest of the market”.
He said that while this has “served it well until now”, the recent reaction from investors “could signal that a greater embrace of technology will be necessary to sustain growth”.
He said: “Our experts highlight that B&M has thus far eschewed significant investments in automation, for example, leaving warehouses and stores heavily reliant on manual labour.
“While this gives stores a ‘human touch’ that many shoppers no doubt appreciate, it has also left the chain highly exposed to recent increases in minimum wage and National Insurance costs.
“That said, less investment in automation also leaves B&M with lower levels of capital expenditure, meaning that it can absorb some of these increased costs without passing them on to customers.”
‘Investors clearly feel uneasy about B&M’s strategy’
Third Bridge’s analyst also highlighted that while B&M’s strategy on price matching has been successful, “there is now a sense that they
might be falling behind, as other retailers roll-out customer loyalty programmes”.
He said that “this doesn’t just give those retailers the opportunity to build lasting relationships with customers, it also generates the ‘big data’ on which the retail sector increasingly relies”.
He concluded that B&M’s approach “puts it at risk of falling behind in the customer data stakes” and in an age where ‘data is the new oil’, “investors clearly feel uneasy about B&M’s strategy here”.
‘The offline only strategy is risky’
B&M is one of the few major retailer retailers in the UK to not focus on online sales – instead wanting to prioritise encouraging shoppers to visit its stores in person.
However, Mohamed said this strategy “too feels increasingly at odds with market trends”.
He said: “While there’s a logic to this strategy that has worked for B&M – get people into stores where they will tend to buy more than they’d planned for – it does restrict sales capacity.
“Our industry experts point out that, when it comes to larger items that are going to be difficult for customers to carry around on a shopping trip, the offline only strategy is risky and, as competition within the sector and from supermarkets heats up, this risk will grow.
What does B&M need to do?
With a few months until B&M next updates the market, the discount retailer has some breathing room to consider how to turn around its falling share price.
Third Bridge has argued that the company opening new stores and boosting like-for-like sales will be key to a successful 2025 and that “embracing data, e-commerce and automation may well be key to achieving this”.
Mohamed said: “It’s clear then that, driven by growing customer demand, the value retail market is becoming more competitive. B&M has become a household name off the back of an innovative strategy that has, in many respects, bucked the drive towards automation and e-commerce.
“Negative investor sentiment however signals that this strategy may need to adapt to the changing retail environment.”
What has B&M said?
In an update to the London Stock Exchange included in B&M’s third quarter results, chief executive Alex Russo said: “Our performance across the Golden Quarter reflects disciplined operational execution across our businesses, driving volume and in turn profit growth.
“The business remains undistracted by the current economic headlines.
“Our operating model is well set up to give customers exceptional value when they need it most. Pricing, availability, store standards and a disciplined opening programme will underpin positive volume growth across our ranges.
“Our DC logistics network capacity upgrades are on-track in both the UK and France to support long-term growth.”
He added: “Our strategy is clear – we are an everyday low-price discounter with a laser-focus in keeping excellence in retail standards and our costs the lowest.
“This allows us to drive volumes by offering our best-selling products atexceptional value to every customer.
“Through this volume growth, and with our leading return on capital business model, we continue to generate profit and cash returns for our shareholders.”
Home Bargains competition
The latest financial figures for B&M came two days after fellow Liverpool discount giant Home Bargains reported huge sales and profit for its latest year.
Home Bargains’ turnover increased from £3.76bn to £4.20bn in the year to 30 June, 2024, while its pre-tax profit jumped from £336.5m to £454.8m.
Newly-filed accounts with Companies House also revealed that the private firm paid its billionaire owner, Tom Morris, more than £1.2bn n ordinary dividends and asset distributions.
Home Bargains said the rise in its turnover was achieved by opening new shops, relocating some existing locations and higher sales from its sites.