City gives B&M benefit of doubt as German business weighs

12 November 2019, 14:45 | Updated: 12 November 2019, 18:43

One of the most totemic moments of the financial crisis was when, at the end of November 2008, Woolworths went into administration after 99 years on Britain's high streets.

The collapse of the retailer, which had 27,000 employees, was the starkest sign yet that the credit crunch was having 'real world' implications that went way beyond the financial markets.

Abundantly clear, throughout, was how popular 'Woolies' was with shoppers.

The business just wasn't profitable enough to service both its debts and a deficit in its pension scheme that had ballooned following the emergency interest rate cuts introduced by the Bank of England in the wake of the crisis.

The disappearance of Woolworths left a vast gap. Not only on Britain's high street, where it had 800 stores at the time of its demise, but also in the markets that it served - toys, household goods, entertainment products and stationery.

The void was quickly filled. Waitrose took on eight former Woolworths stores while Tesco, Sainsbury's and Boots also took on a number of stores.

Yet research by the property publication Estates Gazette last year revealed the two biggest occupants were Poundland, which took on one in seven old Woolworths sites and Iceland, which took on roughly one in 12.

The third biggest occupant of former Woolies stores has been one of the great UK retail success stories of the last decade - B&M.;

The store chain now even lays claim to a title once held by Woolies - 'the UK's leading variety goods value retailer' - but, as today's half year results have shown, that is where the comparisons end.

For a start, B&M; is still growing strongly.

At a group-wide level, it had 1,132 stores at the end of September, up nearly a fifth on the same time last year.

The number of stores trading under the core B&M; brand grew by nearly a tenth to 645. UK sales were up by nearly 14%, to £1.5bn, while UK sales on a like-for-like basis, which strips out the effect of store openings and extensions, were up by 3.7%.

And all this before the so-called 'golden quarter' that includes Christmas.

More stores are planned. Chief executive, Simon Arora, confirmed today he is still aiming to take the number of B&M; stores from 645 to 950.

The company opened 30 UK stores during the six months to the end of September while a further 46 have been earmarked to open by the end of March next year. Mr Arora added, though, that the 950 target was looking "increasingly conservative".

It has been some story. Mr Arora and his younger brother, Bobby, began in business selling homewares and soft furnishings to the likes of Tesco and Argos.

They eventually sold that business, called Orient Sourcing Services, but subsequently in 2004 alighted on Blackpool-based B&M.;

Back then, it was a struggling chain of 21 discount stores in Lancashire and in Greater Manchester. They built up the business, taking it nationwide, reaching 300 stores by 2012. The private equity firm Clayton, Dubilier & Rice became an investor the following year and one of CDR's advisers, the former Tesco chief executive Sir Terry Leahy, became chairman.

Sir Terry, who stepped down as chairman in March last year, helped lead B&M;'s stock market flotation in 2014. The company is now worth £3.76bn.

Today's results also, however, brought a rare setback for B&M.;

Half year pre-tax profits at the headline level fell by 71%, to £32.2m, reflecting a thumping £59.5m write-down in the value of B&M;'s German business Jawoll.

The business, bought by B&M; for £80m in 2014, suffered a surge in operating costs and reported a £12.2m operating loss during the six months compared with a profit of £1.1m in the same period last year.

Mr Arora, who said that Jawoll's management had over-ordered stock, revealed that B&M; was now reviewing the business.

The expectation will be that, having written down most of the goodwill in Jawoll, B&M; could sell the business and cut its losses relatively quickly.

However, with B&M; committed to expanding across Europe, the setback in Germany has raised questions over its ability to do so.

Jonathan Pritchard and John Stevenson, the retail analysts at stockbroker Peel Hunt, told clients today: "The strategic review may bring about a departure from Jawoll.

"This places a two-way pull on the shares. On the one hand, B&M;'s credentials as a European giant are tarnished but on the other, at least here's a management team that knows when to stop throwing good money after bad."

They pointed out that, even without Germany, B&M; still had plenty of scope to expand.

And most City analysts appear, unsurprisingly given B&M;'s track record, to be giving the company the benefit of the doubt.

Greg Lawless and Clive Black, the retail analysts at broker Shore Capital, said: "In our view, the strategic review will now accelerate a decision on Germany, which we see as a potential positive for the investment case, as the German performance has negatively influenced investor sentiment about medium to long term international growth prospects across Europe."

They pointed out that B&M; appeared to be applying the lessons learned in Germany to Babou, the variety goods store in France that the company bought last year, which they said "looks a sound acquisition one year in".

The pair added: "The Jawoll business is perhaps, with hindsight, a poor acquisition given the trading performance over the last 18 months, but we are pleased to see management taking action… we think that Germany was a misstep in taking too long to change the management team and acquiring a business that was initially set up as a clearance store, rather than as a discounter."

They noted that the entire German retail sector is struggling at present as conservative shoppers tighten their purse strings.

Shares of B&M; fell by 5.6% today as investors focused on the setback in Germany. However, even after that setback, they are still up 9.2% since the beginning of the year.

It may have suffered a setback in Germany - but this is a company with a solid track record and which retains a sizeable City fan club.