With the economy continuing to perform weakly and many households operating on a tight budget, companies perceived to offer customers good value could see their sales grow. That is one reason I have been considering investing in B&M (LSE: BME). The variety retailer has a heavy emphasis on value. Might B&M shares also offer good value for my portfolio?
Why I like B&M
As a business, I think B&M has a lot going for it.
Its wide range of products mean that it can act as a one-stop shop. So customers might come in for a single item but end up spending more than planned there.
The business model offers good customer value. But by carrying well-known brands, B&M can reassure customers that shopping in its stores does not necessarily mean trading down in quality.
I think the firm has also developed an effective buying operation. It is able to take on all comers when it comes to selling its own-label products at a competitive price. With a large space to expand in its UK home market as well as overseas, B&M could benefit from growing economies of scale.
That business model translates into financial success. Last year, the company recorded £4.9bn of sales revenues and a £348m post-tax profit.
That is a post-tax profit margin of 7% — far better than the 1.1% managed by Tesco and 0.6% at Sainsbury last year.
Made for the moment
Not only that, but I reckon a recession could actually boost, not hurt, business at B&M.
As shoppers become more price-conscious, the value-oriented offering at B&M could attract new people through its doors.
The company itself said last month that, “The long-term outlook for B&M remains very positive, with many years of profitable growth ahead”. But while I too am upbeat about the outlook for the company, it does face risks.
Take inflation, which continues to plague retail supply chains. It is harder for a retailer focussed on price to pass on increased costs to shoppers without risking losing some sales volumes.
I also see a risk that a determined competitor could copy the B&M model. Piling a wide variety of goods high and selling them cheaply is not a unique idea, after all.
Fair value
Given such risks, do B&M shares offer good value at today’s price?
I feel the answer is that they offer fair value. The shares have increased in value by more than half over the past 12 months. That means that they now trade on a price-to-earnings (P/E) ratio of 16.
I do not think that is very expensive for a company of B&M’s quality. But, at the same time, I do not think it is excitingly cheap either. Retail is a highly competitive business and B&M will need to stay on its toes to live up to its potential in coming years.
Although revenue grew last year, earnings fell. That partly reflects risks like inflation that I think continue to pose a threat to profits.
To be a long-term winner, I reckon the business will need to perform strongly in coming years. That could happen, but declining earnings are not a promising place to start!
So for now, although I like the company, I have no plans to buy B&M shares at their current price.
