Discount retailer B&M European Value (LSE: BME) has surged in the last few days, with share prices up 8.7% this week. What is the reason for this rise and will I buy B&M stock for my portfolio? Let’s find out.
Reason for the rise
B&M was added to the FTSE 100 index in September 2020 as a result of the retail boom during the pandemic. Although share prices have increased 26% since, I see a lot of volatility in its performance in the market. So, what is the reason for the recent jump? I think the strong first-half (H1) showing this year might be the catalyst.
The company’s latest trading update for the financial year (FY) 2022 has highlighted that gross margins for the period were much higher than originally anticipated. As a result, pre-tax earnings for the 26-week period H1 FY2022 is between £275m and £285m, while analysts had predicted it to be around £235m.
The company also stated that “Group revenues year to date have been broadly in line with market expectations.” Strong margins during this period were attributed to the performance of general merchandise and seasonal categories.
Financial overview
First-quarter (Q1) 2022 financials look strong. Total group revenue increased 3.1% to £1.18bn. The company’s subsidiaries like Heron Foods also delivered strong performances. Other European markets like France delivered a 26.9% increase in revenue from Q1 2021, which I see as an encouraging sign for the B&M stock price.
But, on further analysis, I think that these figures might be slightly misleading when considering year-on-year revenue growth. This figure dropped by 4.4% from the 2020 pandemic retail boom. I think this is a sign of the consumer base returning to normal buying patterns.
I can see a drop off in sales in the near future as a real possibility. The company recognises this as well. The trading update states that “although the Group is well-positioned for the upcoming Golden Quarter, trading patterns and strength of customer demand remain highly uncertain for the balance of FY22.”
Will I invest in B&M now?
I think the company will struggle to effectively retain the consumer base it gained last year. Strong competition in the sector and razor-thin margins of the company are also concerning factors. Despite a strong H1 performance, I can see a drop-off when FY 2022’s interim results are released in November. A slide in share prices in this period will not be surprising to me.
Other retailers like Tesco and Sainsbury’s are much higher up on my list of potential investments at the moment. The larger market share and more dedicated consumer base make them a better bet for me in the retail sector.
This brings me to the company’s market performance. Since its induction into the FTSE 100 index, B&M has struggled to show me signs of stability. Despite being an investor focussed on long-term returns, I find this volatility concerning. Although the company could do very well over the next 10-year period, backed up by a solid 112.5% return over the last five years, I think I will wait for the interim results in November and see how the market reacts before I invest in B&M stock.