B&M European Value (LSE:BME) stock fell 22.7% in the FTSE 250 yesterday (20 October). Shockingly, this means the discount retailer is trading around its lowest level since listing in 2014.
At the start of 2022, B&M shares were changing hands for 634p a pop. Now, they cost just 173p — a calamitous 73% collapse!
Yet, the retailer remains profitable, is opening stores, and embarking on a ‘Back to B&M Basics’ strategy to kickstart growth. It’s still offering a dividend too. And after the share price slump, the yield looks enormous at nearly 9%.
So, is this a ‘no-brainer’ buy for my Stocks and Shares ISA? Let’s find out.
What has gone wrong?
Yesterday, the company revealed an accounting error, involving around £7m of overseas freight costs not being properly recognised. Consequently, it cut its full-year adjusted EBITDA guidance to £470m-£520m, down from £510m-£560m.
Unfortunately, such profit warnings have become all too familiar for shareholders. In fact, this was the second profit downgrade inside a month.
Another recurring theme is changes in the C-suite. Back in February, B&M announced that CEO Alex Russo would retire. Yesterday, it said CFO Mike Schmidt would be moving on.
So this is a company that’s going to have to work hard to regain investors’ trust and confidence.
Valuation and yield
The stock looks cheap, trading at just six times trailing earnings. But where this and next year’s earnings will land at this point is anyone’s guess.
As mentioned, the stock is carrying a near-9% dividend yield. Again though, with profits under pressure, I suspect the payout might be cut.
The stock looked cheap to me a while back, but I feared it might be a value trap. I still have these fears, especially with management saying it could take 18 months for the turnaround strategy to bear real fruit.
That said, I can see why some investors might be tempted to load up here. The stock looks dirt cheap and there might be decent income on offer.
Meanwhile, B&M continued its store rollout programme in H1, with nine net new UK openings, five in France, and a new Heron Foods (its frozen foods/grocery business). So it’s not in any existential danger.
Not as cool
However, I’m not keen to invest in the struggling retailer. What worries me here is that B&M’s value model should be shining in these tough economic times, with inflation stubbornly high and low-income consumers under pressure.
But it’s not. Like-for-like sales growth was non-existent in H1, while growth in H2 is expected to be “between low-single-digit negative and low-single-digit positive levels”.
Whenever I have visited a B&M store in recent years, I haven’t been particularly impressed. In my view, B&M hasn’t quite pulled off the same trick as Aldi and Lidl, which have both managed to make their discounted offerings almost cool through smart brand marketing.
Until any turnaround gains real traction, I prefer other cheap retail stocks like JD Sports or Greggs. They face the same consumer spending challenges as B&M, but their competitive positions appear far stronger to me.
