The FTSE 250 harbours many hidden gems, and one that caught my attention recently is BME European Retail (LSE: BME).
It’s best known for its expansive network of discount stores, offering customers low-cost household goods, clothing, and other essentials. Operating across multiple European markets, it benefits from consumers’ increasing preference for budget-friendly shopping amid ongoing economic uncertainty.
Unfortunately, the company has been all over the news lately for all the wrong reasons.
A string of issues
The share price has tanked 51% in the past year and is now at a five-year low, prompting the departure of short-lived CEO Alex Russo.
Last December, the company dropped out of the FTSE 100 after its market cap sank below £3bn. Then, in January this year, it revealed disappointing festive season sales before issuing a profit warning in February.
Both Canaccord Genuity and JPMorgan Chase have reduced their price targets for the stock this year.
Long story short, things haven’t been going great.
Recovery potential?
As the saying goes: when there’s blood in the streets, buy. With the price now at a five-year low and institutional investors threatening to intervene, there could be a great opportunity here.
A new CEO is likely to shake things up and investor intervention might get the cogs turning. If so, 2025 could be a year of strong recovery.
Despite all the problems, BME has instituted an aggressive expansion strategy targeting the UK, Spain, and France. It includes the construction of 50 new stores with a view to boosting revenue and brand visibility.
It’s also been working on its online presence, bolstering e-commerce platforms to complement brick-and-mortar stores. With online shopping taking off since Covid, this is a crucial factor for long-term growth.
What’s more, the falling share price isn’t indicative of bad financial performance. In its latest annual results, revenue climbed 10% to £5.48bn and earnings grew by 5.5% to £367m. While profit margins slipped slightly due to higher expenses, earnings per share (EPS) rose from 37p to 35p.
Now with a trailing price-to-earnings (P/E) ratio of 8.2, the stock looks significantly undervalued. Add to that a meaty 5.6% dividend yield and it has some attractive prospects for both value and income investors.
Risks to consider
The key risk, of course, is that it doesn’t recover. While discount retailers tend to fare well during economic downturns, a severe recession could still impact consumer spending. As we’ve already seen in 2022, inflationary pressures during such periods can cause logistical disruptions, impacting costs and margins.
It also operates in a highly competitive industry, with rivals such as Lidl and Aldi fighting for market share. If a new CEO isn’t found quickly, operational efficiency may slip, giving rivals the advantage.
A promising value stock
With strong financials, a growing presence in Europe and favourable industry trends, BME European Retail could be one of the best FTSE 250 stocks to watch in 2025.
While risks exist, the company’s strategic expansion and solid performance show promise. I’m optimistic that a new CEO and investor action can turn things around for the retailer.
As such, I think investors looking for growth in the discount retail space should consider BME an attractive option.
