While most FTSE 100 stocks have enjoyed a powerful rally in 2024, the same can’t be said for B&M European Value Retail (LSE:BME). The discount retailer has seen more than 40% of its market-cap wiped out over the last 12 months on the back of slower growth.
And with industry titans like Tesco taking more market share, investor confidence in B&M is seemingly dissipating. However, on closer inspection, this business might be on track for a solid comeback.
Long-term growth potential
2023 was a pretty exceptional year for B&M with tailwinds propping up its top and bottom lines. However, as we approached the first quarter of its 2025 fiscal year (ended in March), concerns started to rise about an imminent slowdown. Following the release of first quarter results, those fears turned out to be true.
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Since then, results have continued to be a mixed bag, with overall sales across the first half of its 2025 fiscal year rising by a mediocre 3.7%. For reference, its 2024 fiscal year delivered closer to 10.4%. And while its expansion into France is still in its early days, seeing growth rates stumble from 26.1% to just 6.8% is obviously cause for concern.
However, this is where things start to get interesting. A key differentiating trait for B&M is the firm’s impressive profit margins. On an operating level, profitability currently stands close to 11.4%. That’s among the highest in the retail industry, crushing Tesco’s 4.6%. And yet, margins have continued to expand throughout 2024.
Management’s been steadily shifting its inventory towards general merchandise, growing the product portfolio to over 5,500 items. Almost all of which have higher gross margins versus its branded grocery products, driving profitability even higher.
So while revenues are currently sluggish, earnings continue to move in the right direction. And with trading volumes seeing a steady improvement throughout 2024, the company appears to be well-positioned to capitalise on the current Christmas holiday’s retail ‘golden quarter’.
Risks and valuation
On a forward basis, B&M’s price-to-earnings ratio currently sits at just 8.9. That’s less than half its 10-year average of 19.7 and firmly below the UK retail industry average of 16.8. Needless to say, if this growth slowdown’s just a temporary hiccup, the FTSE 100 stock seems primed for an impressive comeback story.
But what are the threats that could prevent this from happening? My biggest concern at the moment is less operational and more financial. Management’s been taking on significant debt over the last few years and recently announced another £250m bond offering.
The balance sheet‘s far from overleveraged. But borrowing at a time when interest rates are high is far less than ideal. Even more so, given its November 2023 £250m bond offer has an 8.125% rate attached to it. As such, the group’s interest expense is rising rapidly, which could undercut the gains made in operating profitability and reduce financial flexibility in the medium-to-long term.
It’s a risk investors will have to consider when looking at this stock. Nevertheless, with economic conditions improving and management’s shifting product strategy seemingly working, B&M’s comeback potential might make it a risk worth considering.
