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Why this firm is one of the most attractive retail shares I know

One of the most attractive retail shares I can think of at the moment is B&M European Value Retail  (LSE: BME). In its third-quarter trading update today, which covers the three months to 29 December, the discount retailer trumpeted continued growth and solid trading across the peak period.”

Right place at the right time?

I’ve believed for some time that the firm is in the right place at the right time with its value offering, and the progress shows in the financial record. Over the past five years or so, revenue has risen more than 160%, normalised earnings about 320% and operating cash flow by more than 174%. From zero, the dividend has grown since its establishment in 2015. At the current share price close to 310p, the projected dividend payment for the trading year to March 2020 yields around 3% with City analysts predicting cover from normalised earnings around two-and-a-half times.

Yet despite such a strong record and such robust projections from the City, the recent plunge in the share price since the autumn wipes out almost all the share-price progress of the last half a decade. Perhaps B&M has come of age and ongoing trading advances have enabled the firm to grow into its valuation. We could argue that if an economic downturn is coming, sales could fall off a cliff. But that’s a conundrum. If people are skint, where are they most likely to shop for their essentials? In expensive places like M&S and Waitrose, or in places that offer similar stuff only much cheaper, such as B&M? I think B&M, because many seem to love going to the stores already, as you can see for yourself if you stand outside one of the firm’s outlets for a few minutes.

In the third quarter, revenue rose just over 12% on a constant currency basis. Around 80% of that came from the B&M-branded stores in the UK, and like-for-like sales in the UK eased back 1.6% compared to the equivalent period last year. The directors described the previous year’s gain of 3.9% as a “strong prior-year comparable.” Indeed, we can’t expect like-for-likes to rise forever. You can hardly move in many B&M stores because of the number of people in them as it is!

Better value with the shares

The firm had a “difficult November” but a “pleasing finish” to the quarter with UK B&M stores delivering December like-for-like sales up 1.2% and a 3.2% lift in the like-for-like cash gross margin. Looking forward, the directors said in the report that positive sales momentum “has continued into January.” Meanwhile, expansion continues apace with 13 new B&M stores planned for the final quarter, although that doesn’t include the deduction of any underperforming outlets that may be closed if there are any.

I don’t think there’s anything wrong with B&M’s growth trajectory, despite the fall back in the shares at the end of last year. City analysts expect robust advances in earnings and in the dividend this year and next. So, with the growth rating that the market previously assigned to the shares now being cut down in size, I think we are looking at decent value today with B&M shares.

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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK owns shares of B&M European Value. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.