Everyday Low Prices And Strategic Expansion Set To Boost Revenue And Strengthen Margins

Key Takeaways

• Strategic store expansion and disciplined cost management aim to enhance revenue and improve net margins through operational efficiency.
  
• Strong cash returns to shareholders via buybacks and dividends signal robust future cash flows and enhance shareholder value.
  
• Dependence on low prices and volume growth may face challenges from rising costs and supply chain risks, impacting margins, profitability, and financial stability.

Catalysts

Operates general merchandise and grocery stores.

• B&M's continued emphasis on driving prices down through EDLP (Everyday Low Price) combined with volume growth provides a strong value proposition that aims to increase its customer base and market share, potentially boosting future revenues and earnings through increased sales volumes.
  
• The strategic and disciplined expansion of new store openings, including the plan to open 45 shops in the U.K and expanding operations in France with more stores planned than in 2023, is expected to drive top-line growth and increase revenue.
  
• Successful cost management, including the implementation of a new warehouse management system in France and careful SKU discipline, along with strategic sourcing directly from producers, aims to maintain or improve net margins by increasing operational efficiency.
  
• The company's commitment to returning cash to shareholders through buybacks alongside maintaining a stable or growing dividend policy signals strong future cash flows and potential EPS growth, improving shareholder value.
  
• The disciplined financial management and strategic sourcing advantage in both the U.K. and France, with no inflationary pressures in their supply chain increasing pricing competitiveness, could enhance the company's bottom line, maintaining profitability even amidst broader market challenges.

B&M European Value Retail Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming B&M European Value Retail's revenue will grow by 5.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 5.7% today to 5.4% in 3 years time.
• Analysts expect earnings to reach £353.1 million (and earnings per share of £0.37) by about September 2028, up from £319.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting £394 million in earnings, and the most bearish expecting £295.4 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.3x on those 2028 earnings, up from 7.3x today. This future PE is greater than the current PE for the GB Multiline Retail industry at 13.0x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.23%, as per the Simply Wall St company report.

B&M European Value Retail Future Earnings Per Share Growth

Risks

• The company's commitment to maintaining low prices through Everyday Low Prices (EDLP) and volume growth, while admirable, may not be sustainable in the long term, especially if rising costs outpace the ability to cut prices further, potentially impacting net margins.
  
• B&M's reliance on importing large volumes of goods, especially from China, might expose the company to significant risks related to supply chain disruptions, tariffs, or geopolitical tensions, which could adversely affect earnings and revenue.
  
• Expansion efforts, such as increasing the number of stores in both the UK and France, bear execution risks and require significant capital investments, which, if not managed well, could strain the company's resources and lead to inefficiencies impacting financial performance.
  
• The heavy focus on non-inflationary growth through volume raises concerns about the business's ability to adapt its pricing strategy in a high-inflation environment, which could affect profitability if cost controls become unsustainable.
  
• Despite the company's strong cash generation, the approach to using debt and leverage might pose financial risks, especially if external economic conditions worsen, potentially affecting the company's financial stability and dividend payments.

Valuation

• The analysts have a consensus price target of £4.008 for B&M European Value Retail based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £6.0, and the most bearish reporting a price target of just £2.07.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £6.5 billion, earnings will come to £353.1 million, and it would be trading on a PE ratio of 15.3x, assuming you use a discount rate of 10.2%.
• Given the current share price of £2.31, the analyst price target of £4.01 is 42.4% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.