For stock pickers of all shapes and sizes, there’s two major macroeconomic issues that are dominating their behaviour right now. Namely, the immense economic and political damage a disorderly Brexit could cause in the UK, and the escalating trade dispute between global heavyweights the US and China.
Just look a few hundred miles eastwards from London though, and there’s a major crisis brewing which also poses a huge threat to the global economy. I’m speaking of the sharp economic slowdown in the continental engine room of Germany and the threat of contagion across the whole of Europe.
Unemployment is rising for the first time since 2013, industrial production is sinking at the fastest rate for four years, and the much-respected Ifo business confidence survey has sunk to levels not seen for almost a decade. There’s clearly a lot for market makers to chew over.
Particularly galling for B&M European Value Retail (LSE: BME) is the impact tough conditions in the Teutonic territory are having on shopper appetite, of course. Official data showed retail sales in the country sank 2% in April, while the latest GfK consumer confidence gauge slumped to 10.1 in May, the worst reading since March 2017.
B&M operates almost 100 stores in Germany, predominantly under the Jawoll brand, and has been no stranger to troubles in this foreign region. Indeed, in the last fiscal year, it swung to a £10.2m EBITDA loss, from a £5.6m profit the year before, reflecting the need to clear out obsolete product ranges and to source more product through the supply chain.
The retailer still has a long way to go to mend its German operations, a turnaround story made all the more difficult by the tough conditions on the high street there. I’m confident, though, that B&M can continue to deliver solid profits growth at group level despite these issues, paying testament to the ongoing progress at its UK divisions.
German expansion goes on
Primark, the retail clothing division of Associated British Foods (LSE: ABF), has also been in some turmoil because of the tough economic conditions in Germany.
Sure, the cost of its clothing may be mega cheap like the wares over at B&M, but this hasn’t been enough to stop sales from falling more recently. So tough have conditions been in Primark’s Central European territory that it’s taken steps to refresh management there as well as reduce selling space at a number of its stores.
Largely speaking though, ABF is confident enough in Primark’s long-term outlook that it’s opened stores in Berlin and Wuppertal since the start of the fiscal year, and is planning to cut the ribbon on a new unit in Bonn in the next few months.
International expansion has proven to be the cornerstone to ABF’s great Primark growth story in recent years. And with the business not slowing on this front, I expect it to keep impressing on the revenues front, despite problems in individual markets like Germany.
Primark has also proven to be an undisputed success story in the UK, showing the Footsie firm knows what it takes to thrive in an increasingly competitive marketplace during tough times for the average shopper.
I fully expect the steps it’s taking to bolster its global footprint will deliver exceptional profits growth in the years ahead.
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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK owns shares of B&M European Value. The Motley Fool UK has recommended Associated British Foods. 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.