Holders of B&M European Value Retail (LSE:BME) shares have endured a tough time in the past year. Having fallen 50.6% in value, the discount retailer now sits in the FTSE 250 having been relegated from the FTSE 100 blue-chip index in December.
And things seem to be going from bad to worse for B&M. On Monday (24 February), its shares slumped again as it cut profits guidance and announced the departure of chief executive Alex Russo.
Investors should be braced for more bumps along the way. But a part of me thinks now could be a good time to consider piling into B&M shares. Could it prove to be the best recovery stock on the FTSE 250?
Steady slide
B&M’s suffered its first investor exodus when it released full-year financials in June.
On the plus side, the firm announced adjusted EBITDA of £629m for the 12 months to March 2024, at the top end of forecasts. But it spooked the market by failing to publish forward guidance for fiscal 2025, leaving investors fearing a sales slowdown.
The firm finally guided in November that corresponding earnings this year would range £620m-£660m. However, news has been grim since then, trimming the top end of this estimate by £10m in January. And this week, B&M absolutely took the scythe to its forecasts. Adjusted earnings are now tipped to range £605m-£625m.
B&M said the downgrade “reflects the current trading performance of the business, an uncertain economic outlook and the potential impact of exchange rate volatility on the valuation of our stock and creditor balances which is a non-cash item“.
Cheap as chips
The rapid sales growth of recent years has also slowed to a crawl. At constant currencies, group revenues were up 2.8% in the nine months to December. That’s down markedly from growth of 8.1% in the corresponding 2023 period.
The retirement of Russo — who had been in charge since September 2022 — is a telling signal that all’s not well at B&M. His departure may also add to the near-term turbulence.
But for patient investors, I think B&M’s crashing share price could represent an attractive dip-buying opportunity. Today, its shares trade on a forward price-to-earnings (P/E) ratio of just 7.5 times. This represents great value, in my opinion.
Market opportunity
I’m surprised that B&M’s sales have cooled so sharply in this tough period for consumers. Demand for lower-priced items tends to thrive when inflation’s stubborn and the economy’s weak.
I feel intense competition is impacting revenues, while B&M’s lack of an online channel isn’t doing it any favours. These could remain big problems going forward.
But there are also reasons to be optimistic. The discount retail segment is expected to continue growing strongly, by around 4% per annum in the next few years.
B&M’s rapid expansion positions it well to capitalise on this trend. It plans to have 1,200 B&M-branded stores in the UK, up from 772 today. Further expansion is also likely in France and across its Heron Foods division. Naturally, this scaling up will also provide B&M with profits-boosting economies of scale.
While it’s not without risk, I think it could — at current prices — be one of the FTSE 250’s best recovery stocks to consider.
