Shares in FTSE 250 cash-and-carry operator Booker Group (LSE: BOK) rose by 10% this morning, after it announced the acquisition of the Londis and Budgens chains of convenience stores.
Booker also published its final results today. Earnings per share rose by 11%, despite sales only rising by 1.5%. The final dividend is up 14% to 3.14p, and Booker also announced that it’s planning another 3.5p per share capital return for shareholders.
Good news all round?
Booker’s results were solid, but in my view the big news is Booker’s aggressive move to become the largest player in the convenience store sector.
Booker will pay £40m for the 1,797 stores, which it will operate alongside its existing Premier and Family Shopper retail brands. Once the purchase is complete, Booker will have 4,909 UK convenience stores, in addition to its Booker and Makro cash-and-carry chains.
The deal will give Booker control of two of the five largest convenience store chains (Premier and Londis) and make it by far the biggest operator in this sector.
Why so cheap?
If you’re wondering why the price tag for Londis and Budgens is so low, it’s because Booker isn’t acquiring the actual stores, it’s acquiring the brands. The stores themselves are all independently operated (Londis) or franchised (Budgens).
The store owners are provided with branding and access to better pricing and stock choices. In return, they have to guarantee to buy a certain amount of their stock from the brand owner, which will now be Booker.
In total, Londis and Budgens sold £833m of goods last year, which would have added 17% to Booker’s total sales of £4.8bn. However, it’s worth noting that the current owner of Londis and Budgens reported an operating loss of £7.4m last year.
Booker expects the deal to have no effect on earnings in the first year and to add to profits from the second year onwards. The firm believes that a more efficient supply chain and economies of scale will drive sales growth and profits at independent stores.
Can Tesco and Morrison do better?
The question for investors, of course, is whether the big supermarkets can outdo Booker at its own game.
Supermarkets have been expanding aggressively into the convenience store sector in search of growth.
Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US) now operates 1,735 Express stores, while latecomer Wm Morrison Supermarkets (LSE: MRW) (NASDAQOTH: MRWSY.US) has 153. These stores appear to be multiplying rapidly in every town in the UK, suggesting to me that we may soon end up with too many of them.
I suspect that both Booker and the supermarkets may end up closing some convenience stores over the next five years.
Today’s top pick?
Booker’s operating margin was 2.9% last year. That’s probably a little better than Tesco will manage this year, and broadly in-line with what I’d expect from Morrison.
Which firm looks the best buy in today’s market? Here’s how they compare:
| Company | 2015/16 forecast P/E | 2015/16 forecast yield |
|---|---|---|
| Booker | 23.6 | 3.1% |
| Tesco | 23.3 | 0% |
| Morrison | 15.9 | 3.1% |
To be honest, none of these shares look that tempting to me at today’s prices. Why pay such a high valuation for businesses with low profit margins in an intensely competitive market?
I don’t intend to buy any of these shares at current prices.