Profit before tax plunges by 70.5% to £32.2m at low cost retailer

Liverpool-based low cost retailer B&M European released interim results today showing solid progress in its core business, but problems within its German arm, Jawoll which hit profit levels.

Bosses say they are conducting a review of the German operations to determine Jawoll’s future.

B&M saw its share value fall in early trading on the back of the bad news. Having closed at 378p per share the value dropped to 342.88p when the markets opened, but has since recovered to 351.8p per share by 10am.

The figures for the six months to September 29, showed group revenues – excluding the Babou chain in France which was acquired after the half year in financial year 2019 – increased by 12.4% to £1.759bn, and 12.3% on a constant currency basis.

B&M UK stores business revenue was up 13.8%, which included a 3.7% increase in like-for-like revenues.

However, the group’s profit before tax fell  by 70.5% to £32.2m, from £109.1m at the same time last year, which included an impairment charge of £59.5m relating to Jawoll.

B&M said the disappointing financial performance in Germany continued due to distribution issues and weak sales performance. A strategic review is now being undertaken to determine the future of the business.

In contrast important progress in evolving the product offer at Babou has been achieved, with the first three B&M-branded stores opened in France.

After a year of ownership, progress has been made on the integration of Babou with the clearing of old stock and introduction of a number of directly-sourced new product ranges.

The Heron Foods brand has continued to trade well and opened 10 gross new stores – net nine after one closure – and is on track to open at least 20 gross new stores this financial year.

Thirty gross new B&M UK store openings took place within the reporting period, of which four were relocations (net 25 after one closure), and the group is on track to open at least 46 net new B&M UK stores this financial year.

The construction phase of a new one million sq ft distribution centre in Bedford has been completed. It is currently in fit-out and initial ‘soft opening’ phase. B&M reports strong investor demand for the sale and leaseback investment.

Trading in the third quarter, so far, has seen continued solid like-for-like sales growth in the B&M UK stores business and it is well placed for the ‘golden quarter’ trading over the Christmas period.

The interim dividend of 2.7p per share is in line with last year and is due to be paid on December 20.

Chief executive Simon Arora said: “We have delivered a solid overall first half performance driven by our core B&M UK stores business which constitutes 86% of group sales.

“Our existing stores performed consistently well through the last two quarters, generating half year like-for-like of 3.7%.

“The current crop of new stores also achieved especially strong results.

“The core business has made a solid start to the second half of the financial year. Heron Foods has continued to grow in the UK and we remain very pleased with the overall progress of that business.

“In Europe, we have seen contrasting performances from Babou in France and Jawoll in Germany.

“Babou has made good progress with the planned changes to its product offer.

“The performance of Jawoll has continued to be impacted by trading and operational issues and its financial performance remains disappointing. The board is carrying out a strategic review of Jawoll in order to determine its future.”

He added: “We are well placed for the golden quarter in our main B&M UK stores business.

“Despite the continued uncertainty in the economic environment generally, we are very proud to say that each of the top five store opening days in our history have all been in stores we have opened in the last 12 months.”

Russ Mould, investment director at Manchester investment platform AJ Bell, said: “Retailing is a hard business and it requires flawless execution.

“There is no room for error given intense competition. Very few companies can deliver positive results on a consistent basis and B&M is the latest to trip up.

“It may be pleased with 3.7% like-for-like sales growth in its UK operations, but domestic news has been overshadowed by overseas woes.

“German operations aren’t going as planned with this part of the company now under strategic review. It goes to show that having a low price point does not equate to guaranteed earnings success.

“B&M seems to have made a mess of its German business, called Jawoll. It looks like poor management decisions with product availability issues, late arrival to stores of seasonal stock and huge markdowns to clear old stock.

“There have also been large costs incurred on third party warehousing and logistics.”

He added: “This looks like a business which has taken its eye off the ball and today’s sharp share price decline is investors’ way of expressing dismay with the performance.

“B&M has another overseas operation in France which it acquired a year ago. Investors will hope that B&M doesn’t also mess things up with these operations like it has done with Jawoll.

“The group’s priority is to learn from what’s gone wrong in Germany and make sure neither the French nor UK operations make the same mistakes.

“It brought in a new German chief executive two years ago and a new trading director joined in February 2018, so one may draw the conclusion they haven’t done a very good job.

“However, in May, B&M blamed earnings growth challenges in Germany on the previous management team, rather than saying the new leaders haven’t delivered.

“B&M would be best getting rid of the German business and sharpening its focus on gaining scale in the UK and France.”