Will a recession help or hurt the B&M share price?

The B&M share price has been tumbling and there’s a recession looming, So why would our writer still consider adding the retailer to his portfolio?

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For a while, shares in discount retailer B&M (LSE: BME) were riding high. But lately, the B&M share price has been tumbling. It is now 36% below where it stood a year ago.

With its focus on cost-conscious shoppers, B&M would seem to be well-positioned for a recession. So could the share price tumble be a buying opportunity for my portfolio?

Falling B&M share price

I think a key reason for the decline is the planned departure of the company’s chief executive. In 18 years, he has helped turn a small struggling regional chain of stores into a huge UK-based retailer with a strong Continental European presence. If his replacement lacks his business acumen, sales and profits could suffer.

Another concern is weakening performance. Revenues fell 2.7% last year. In the main UK ops, B&M’s business sales decline was steeper, at 4.1%. In the first quarter of this year, sales also continued to fall.

Pre-tax profit last year was flat. That is not bad given that sales fell, but it is less than B&M shareholders have grown used to during a period of dynamic growth. Not only that, the company cut its dividend by 4.6%.

As an investor, I never see a dividend cut as a sign of strength, even though it may be a financially prudent move. Taken together, the results seem to suggest that the days of gangbuster growth at the high street favourite have fizzled out. That explains the fall in the B&M share price.

Recessionary impact

The UK is expected to enter a recession later this year. In France, where B&M has over 100 stores, the government has ruled out the chance of a recession for this year. But inflationary pressures are bound to lead to shoppers tightening their belts, in my opinion.

I think a recession could boost sales at B&M. It may not see the sort of lift it witnessed during stages of the pandemic, when it was one of a limited number of retailers to stay open. But its cost-focused product assortment could appeal to shoppers who are counting the pennies more than before.

As the company said in its results: “During such times customers will increasingly seek out value for money, and B&M is ideally placed to serve those needs”.

I see that as good news for the long-term outlook too. I think recessions often bring new customers into discount shops. Some realise they like the value and keep shopping there even when the economy starts to grow again.

But what concerns me is that alongside a likely recession, B&M is grappling with cost inflation in its supply chain. So an increase in sales would not necessarily mean higher profits. In fact, if costs keep rising strongly, sales could go up but profits move down.

My move

I like the B&M business model and its price-to-earnings ratio of 9 looks like good value to me.

Although a recession could help reverse declining sales, I am concerned profits could start to fall. But the company remains hugely profitable. It has a well-proven business model, large customer base and strong reputation for value. I see those as strong assets and would consider using the share price fall to buy the shares for my portfolio.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Christopher Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended B&M European Value. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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