B&M European Value Retail plc (BME) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to B&M European Value Retail's annual presentation for our preliminary results for the year ended 26th of March 2022. I'm delighted that we're joining in person again after a long interregnum, but also a warm welcome to the, I'm told, 100 people who are listening into the webcast. Good morning, everyone. So I'll start, if I may, by just mentioning that we have a few faces in the room that you may not have met before. I'm pleased to be joined today by Gareth Bilton, our U.K. Stores Director; Allison Green, our Group HR Director; and Pete Waterhouse, our Group Financial Controller, who has worked so assiduously to get these numbers out on time and in the efficient manner that he always does. So I'll start, if I may, with some highlights. And I think the summary today is that this has been a year of strong execution that's allowed us to consolidate the gains made over the last 2 years during the pandemic. You'll see that our revenues for the year were GBP 4.7 million, which on a 2-year basis is a very healthy 22% uplift on that pre-pandemic year, which ended end of March 2020. Behind that number, you have a U.K. LFL of minus 9% on the 1 year, but a perfectly healthy 13% on that 2-year basis. Over the course of the year, we opened 34 new stores for the B&M fascia with 14 closures. I'll come back to the closure point later. It's actually dealing with legacy stores that were opened 11, 12 years ago but no longer fit the bill. Heron, we opened 16 new stores, but excitingly, in France now, we have all our stores branded and trading as B&M. Our group EBITDA decreased marginally by 1% but delivered a very healthy GBP 619 million on a pre-IFRS 16 basis. And the number to have in your mind is that compares to GBP 342 million in the year ended March 2020. So we have sustained and held on to the material uplift in earnings on a 2-year basis, in fact, plus 80%. That was driven by a strong outturn in our core business, B&M U.K., but particularly complemented by a strong performance -- an excellent performance impact in our French business. The business ended the year with very modest leverage at only 1.3x on a net debt-to-EBITDA basis. and that's despite a total dividend for the year of 51.5p comprising 16.5p of ordinary dividend and, of course, the 25p special dividend that we paid at Christmas. That 51p total dividend when you compare to today's share price is really quite remarkable. But with that, I'll pass over to Alex to talk you through some of the numbers in detail.

Thank you, Simon. Good morning, everybody. I'll go straight to Slide #4, for the ones who are joining us remotely. So strong year exit just a couple of highlights on this slide. 1,119 stores by the end of the financial year. And as Simon says, we closed on a total revenue just shy of GBP 4.7 billion, down at a group level of 2.7% for the year. Key numbers in here are adjusted EBITDA -- remember, this is on a pre-IFRS 16 basis, which is a way that we speak about it, GBP 619 million, which is 13.2% group EBITDA margin. And the key point in there is that we stepped up 20 basis points year-on-year on the prior year EBITDA margin of 13%. If we go back a couple of years to FY '20 on the right-hand side of the slide, we can see that we are over 400 basis points on 2 years, up in terms of profitability. We go back all the way to the statutory level, the performance of the business was pretty much flat year-on-year. A number that we don't necessarily speak regularly, but it's also useful to remember on a properly statutory basis, our EBITDA was GBP 828 million for the year, which is a margin of 17.7% that was pretty flat year-on-year consistently. If we go to the next slide, Slide #5, I'll point you straight to the group revenues on a 2-year basis. If you look at B&M U.K. and France, on a 2-year basis, the total revenue of these 2 segments was almost 25% up, 24.5% for B&M U.K., 24.5% for France. At a group level, if you look at the gross margin, 77 bps up on the year and in excess of 350 bps on a 2-year basis. We'll expand a bit more the driver for that performance. I think the numbers, which are really critical and here to remember as we execute the year is EBITDA margin for fascia. B&M U.K., 14.4%. Very strong performance, pretty much flat year-on-year. Heron at 5.5 in a very competitive grocery business. I think it's a solid performance with a much stronger second half than the first half. And you can see the performance of France, which has been remarkably strong in the last financial year. We've exited with 9.2% EBITDA margin. You had asked a question to Simon and I 1 year ago, I think this has basically exceeded our expectation in our performance. So that business has a lot of momentum heading into a new financial year. Core to the business and the business model, cost control, cost discipline, cash discipline, stock discipline has been consistent throughout the 3 fascias. And that's something that in this environment is critical heading into FY '23. We go to the next slide. So what are the building blocks of the revenue? On the left-hand side, this is the B&M fascia. So we're comping on very high FY'20 unit like for like. So we know B&M delivered negative LFL, 9% on a 1-year basis. And you can see the revenue impact of GBP 353 million, which is the gray bar on the left. But net new stores, the ones opened in the last 2 years compensated over half of that LFL performance. So you have GBP 133 million and GBP 67 million totaling GBP 187 million on the annualization of the stores that we opened in FY '21 and '22. Heron, flattish on a stronger second half than the first half. And France, standout performance, adding GBP 44 million to the year. And that's how we exit the year at GBP 4,673 million, okay? We go to the next slide, which is EBITDA. Again, prior financial year GBP 626 million, we closed at GBP 619 million on a pre-IFRS 16 basis. We can look that the LFL performance profit impact of the negative 9% was basically GBP 86 million, but all of that basically compensated GBP 30 million and GBP 18 million in terms of FY '21 and '22. The only reason why it's GBP 3 million actually should be captured as part of the earlier 2 blocks. We had more closures and relocations, but this is all format stores, which is part of the recycling of assets we have in the business. France stepped up GBP 21 million in the year. And that has been a consistent performance all the way from Q1 to Q4 of the financial year. That really sums up how we go from 13% to 13.2% EBITDA margin in the business, and we can see B&M fascia in a thoroughly consistent 14.5% to 14.4% EBITDA margin for the full financial year, okay? We go to the next slide, Slide #8. Look, you've seen the LFL on a 2-year basis, which are the blue bars. We had a very strong Q1. We know what happened in March and April. We had a seasonally very warm start of the financial year. Gardening was flying off the shelves. We had a fairly consistent Q2 and Q3, close to 14%. So the question is how we see that LFL on a 2-year basis is 4% or high teens negative in the quarter. I'll give you 2 stats, which are not on this slide, which are really useful to explain this. If you go to March 2020, which is when the pandemic started; the LFL of the business was 21%, plus 21%. And if you go to March 2021, when we had a very warm weather, 30% positive. So plus 21%, plus 30%. And that's simply, you add those 2 numbers, and it's actually quite a strong performance being able to exceed at plus 4% in the quarter. Important line in all of this is to remember that on a 2-year basis, the LFL of the business was 13%, which has been a very strong performance throughout the year. Next slide. So what are the drivers of the group gross margin? 77 bps up on the year, 3 components. So B&M U.K. was just over 50 bps up on the year. And that was 2/3 mix on nongrocery, 1/3, no markdown. We've had 2 years of very, very strong seasonal sell-through. The important point on B&M is that grocery gross margin percentages are flat in the year. So the price position remains very strong and steady. Simon is going to elaborate on that in a minute. So it's all around mix driving 2/3 of that uplift. Heron price position consistently strong, flat year-on-year on a percentage basis. And you can see the uplift on gross margins on B&M France in excess of 400 basis points. That's mix, nongrocery coming through much better open-to-buy disciplines and much stronger sell-through performance than the prior year. We go to the next slide, which is the cost base of the business. Let's concentrate on the cost of sale of the 3 fascias on a 2-year basis. So we compare this to the pre-pandemic year FY '20. We exited last year with a 40 bps cost-to-sale leverage in the business, B&M fascia with an actual of 23%. Heron had a slightly more challenging given the early start of the pandemic, exiting at 26.1% of sales, but I expect that to start improving in the current financial year. And France at 36.1%, 400 bps. That's a cell density leverage in the business. And that's a key point to emphasize in France. It's sales. It's stock disciplines and cost leverage. If we think about B&M fascia, wage inflation, where it's transport retail, that does not materially impact the cost base. It's a very flexible operating cost structure, and we're able to flex that actually fairly, fairly strongly. Look, utilities, we know what's happening in the market, but that only represents a very small proportion of our cost base. But that is not going to fundamentally change the cost structure of the business heading into the new financial year. France, I think the highlight. Next slide. A couple of key points. Maturities on debt are long. The last issue was in November last year. We went for 7 years. So I think the capital structure of the business is in pretty good shape. And the key point in here to remember to model, given the last issuance, GBP 35 million per annum is what you can model. We expect that to stay steady in the new financial year. Next slide. The key number in here is working capital. In FY '21, we had an inflow of GBP 123 million, unusually high. That was the start of the pandemic in March. We're running very low stock levels, just over 7 weeks cover, which is remarkably low for the B&M fascia. So some of that unwind happens in FY '22, but we made 2 decisions during the year. First, in the run-up to Christmas, autumn/winter, and more importantly, in the run-up to spring/summer in the current year, we decided to ship early. So stocks in the system is in the shelves. Why take any risk on the pandemic? So this was a conscious decision. So the working capital position will start unwinding throughout the course of the year, but the important piece is we have the availability. We have the right amount of stock in the system, and that will allow us to strike hard in the next 3 quarters. We will only revert the position of shipping early when we see the whole supply chain stability just settling down a bit. That might take a few quarters, but this is a proactive decision we've taken. Leverage ratio, as planned, fairly modest 1.3x, well below our ceiling of 2.25, okay? And that basically puts us in a net debt position at the end of the year of GBP 790 million. Maintenance CapEx remains very light. We continue to be very disciplined on how much we spend. The only one to mention is the GBP 42 million in maintenance. Why is it higher year-on-year? It's France rebranding. So it was a conscious decision, every single store is trading under the B&M fascia. We expect this to normalize back to normal CapEx runways in the rest of the year. Final slide, 13. Look, you know our trajectory is very consistent in terms of revenues, EBITDA. And the step-up, we believe it's structural the sales densities have been consolidated over the last 2 years. And you have a bit of an anomaly on cash flow, which I have explained that, that will normalize in the current financial year. It's a good year of consolidation. But more importantly, it's a year that allows us to build on the track record, the new customers that we have retained and puts us in a fairly strong position heading into the new financial year. Simon, back to you.

So yes, that is the key question, isn't it? How have we consolidated the gains of that first year of the pandemic? How do we hold on to those new customers? You'll recall that we've used Barclaycard analysis to try and understand what's happening to our customer base. Back in May 2020 and then in March 2021, we ran some analysis to see how many new shoppers had spent money with us that we haven't seen earlier that year. So in May 2020, these are people that shopped with us in that month but had not been seen in the previous 5 months since the 1st of January. And likewise, in March '21, how many shoppers had not been seen in the 5 months up to that period in time. We've refreshed that analysis and what we have found is that the vast majority of those cohorts of new shoppers came back. Around 3/4 of the shoppers are still shopping with us a year later. And that's what's allowed us to enjoy this sustained step-up, this consolidation in terms of revenues and earnings, about GBP 619 million of EBITDA that we've explained to you already today. Who are these people? They are the backbone of the U.K. shopping population, their families. They're low- and middle-income families that represent 15% of all shoppers. We think that's a good place to be. That demographic that in the current macro environment wants or need to save money. They're going to come to B&M. They're going to come to discounters rather than spend more unnecessarily at a category specialist or a department store or a mid-market retailer. Let's now give you some insight into the detail of our like-for-like performance on a 2-year basis. So we're comparing on a 2-year basis so that we see through the noise of the previous year's lockdowns, restrictions and abnormalities. And the key message is that when you think about the 13% 2-year like-for-like performance, it's actually remarkably consistent for 10 months out of the 12. April 2020 was bonkers. We've never seen anything like it, north of 30% like-for-like. I ask you to have that number in mind when you start thinking about current trading and the numbers that I'm going to share with you in terms of the first 8, 9 weeks of this financial year. That's what we were up against April '22 on a 2-year basis. March '21, we dipped negative because that was the year that you're comparing against the panic buying. If you recall, the U.K. went into lockdown, I think 23rd or 24th of March, and in the 3 weeks prior to that, our shelves were empty. But other than those 2 abnormalities actually a pretty consistent performance throughout the year just on when compared on a 2-year basis. We're mindful that a number of our peers have shown the numbers on a 3-year basis so that you can see through the noise of that March 2020 panic buying, you can see through the noise of March and April at 2021 when, if you wanted to socialize, you have to do it in your garden. And so our gardening sales went crazy because you weren't able to do so indoors. So this is the 3-year like-for-like, and this has shown you current trading from the beginning of this calendar year. So for January just done all the way through to the first 3 trading weeks of May 2022. And you see them healthy. What you don't see is sales falling off a cliff. What you don't see is what some business commentators in the press are saying, which is the consumers going on strike. We're just not seeing it. I can assure you that actually the key driver of how we're trading, whether it's April or May, is not the price of fuel. It's not the war in Ukraine. It's not whether it's sunny or not. It's whether you want a barbecue or whether you want to buy patty yourself. So we're not seeing any clear pattern of sales falling off a cliff actually on a 3-year basis, it's steady. I wouldn't pretend that we're trading our socks off. We're not, but it's okay. And you'll see later when we talk about our earnings expectations for this year, that's why we view the year with a certain amount of cautious optimism, actually. Let's talk about category performance. So the dark bars, the blue bars are nongrocery. It's DIY, it's furniture, it's gardening, it's Christmas decorations, it's toys. And the orange bars are our grocery and FMCG. Practically every department was in positive territory. The general merchandise did particularly well at the top of the page. And I can share with you that the seasonal categories are some of the best-performing categories. And we like that because we do believe that for your garden and outdoor leisure or your Christmas decorations and gifting, B&M is now a destination store. We don't have to be next door to a Tesco or a large Marks & Spencer. People come to us because they know we've got the right product range and at the right prices for those categories. Let's now talk about the grocery department. And by grocery, I mean, of course, not just food and drink, but the cleaning and the toiletries. The key message is that we live and breathe the price gap. Every single buyer in our team on a weekly and fortnightly basis is reporting to their boss on what is my price gap. For 8 years, we've been measuring this, and it's not changing. We won't let it change. Over the last week, 26th of May, 550 products go out, get the price showing the spreadsheet, 15% price gap hasn't changed. And as Alex mentioned, our gross margin, pretty stable actually. And in this world of increasing prices, we're going to be the follower, not the leader. We will always wait until the big 4 move, and then we'll follow, always maintaining the price gap. Turning now to nongrocery. So these departments have been key drivers of the financial performance in the year under review. We had a great gardening season, our best-ever gardening season, which, in fact, built on the best-ever gardening even in the back of the year before. So 2, 3, 4 years now of compounding increasing market share, and this is a category in gardening where, dare I say the competition -- it's easy competition. Pure garden center and independent, you have to make huge gross margins in the summer months because in the winter months, it's a mausoleum. So we do really well. Christmas. We're good at supply chain. That's our magic sauce. We know how to source out of China. Our product arrive on time, it's on trend, it's well priced. We have our best ever Christmas. As we think about the supply chain for this coming year, if we managed last year, we can certainly do it this year. Look, I don't want to sort of overstate the case. But the reality is we're one of the largest importers of general merchandise from China into the U.K. Our buying power, our relationships with our suppliers, with our shipping line allow us to make sure our product is here on time, and we also make a conscious decision to have the product in the U.K. in good time. We carry about 12 weeks' worth of inventory in the U.K. So even if a ship leaves Shanghai 1 week late, 2 weeks late, stock cover in the U.K. might go from 12 weeks to 10 weeks, so it doesn't impact what's happening on the shelves. I often talk about how the engine room of B&M is our buying team. It's our USP. It's the largest department in the business. And it's why we exist. The most important department in B&M isn't the marketing department. It's not customer services teams, all of the things that other retailers might be good at. It's the product and price. And the nature of our model allows us to have a competitive advantage because of that limited assortment that we focus on. And so what I'm sharing here with you is an example of 1 department, laundry department. It's 300 SKUs. But what you see is that for those 300 SKUs, it has its own senior buyer with a couple of colleagues. It's got a senior merchandiser with an assistant reporting into a Head of Home and then Head of Home merchandising through the change of the Trading Director. One of the reasons, of course, I'm sharing this with you is because as you think about the announcement around my succession, this is the important slide, continuity. These people in these roles, they've been there for a decade, 2 decades. We're different with other retailers that might move a buyer, 1 year, you're doing toiletries. The next year, you're doing pet care. 2 years later, you find yourself buying crockery. That's not how we work. Our pet care buyer has done nothing but buy pet care for 20 years. Our confectionary buyers buy nothing but confectionary for 20 years, the list goes on. And one of the consequences of the pandemic is that we genuinely believe we become a better business by virtue of the restrictions imposed upon us. We have our own department looking at trends, look and feel. We have our own designers doing surface decoration, product design, packaging design, ethical auditing, quality control, and we are advantaged because we have a very effective team in Hong Kong and Mainland China, 80 colleagues in our JV, making sure that our product leaves first ahead of the competitions from the factory. Turning now to the store rollout. So we ended the year with 701 stores. Our U.K. store target remains at 950, but it's increasingly looking conservative. The new number on this slide that we've not shared with you previously is that our very recent analysis using the term called Geolytix, is that a significant 38% of the U.K. population don't have a B&M store within 3 miles. Our average basket is about GBP 18. Shoppers are not going to drive an hour for an GBP 18 basket. We don't pretend that that's the nature of our business. So I think what this tells you is that when over 1/3 of the population don't have a B&M in their catchment, there is a long runway of growth ahead of us. And then you see here with the red dots, that growth is both infill in our home territory in the northwest of England, all the way to the Southeast, Scotland and indeed Northern Ireland. When we think about new stores, the mantra in the business is quality, not quantity. What we show here is the store contribution, the EBITDA margin at store level of the different cohorts of stores we've opened over the last few years. On the left-hand side, you have the company average, all 701 stores. We're at 21% store contribution business. If you look at the stores that we've opened in FY '22, the year under review, bang on average. The year before that, slightly ahead of average. So I think what this is saying to you is that the store rollout is being executed without any dilution of quality and no alarm bells are ringing around, I don't know, cannibalization or dilutive returns. We're very proud of this final statistic on the page. The payback period for a new store at B&M in terms of the CapEx is only 7 months. There are not many retailers around the world that can make that bust. And even when you factor in the working capital cost of having the inventory on the shelves, it's less than a year. This is a business that throws off a lot of cash despite opening new stores and going into nuance space. So what's the outlook for that continued space rollout? what we're asking you to model for this current financial year coming up is at 40 stores. Sorry, there's a typo here, I do apologize. FY '23, that I should say. So 40 stores this coming year. And the reality is that in the business, yes, we have an appetite for, say, 50 stores a year, but we're always going to be disciplined around quality rather than quantity. And 1 mile frustration is at the moment, there isn't as much development going on as there could be, whether that's steel prices going up or availability of sites or frankly, a log jam in the planning departments across the country. Some of those factors are outside of our control. But certainly, our conviction that the U.K. can carry at least 950 stores remains in place. I mentioned earlier that I was going to explain store closures to you and here we give you a profile of those closures over the last few years. In the last couple of years, there's been a spike. We closed 13 stores in FY '21, 12 stores in FY '22, and we had a small number of relocations in both years. You can see from the average age of those stores, that these are stores that we opened over a decade ago, and frankly, they're tertiary locations, too small, no parking. And in the vast majority of cases, the reason we've closed them is because we've already opened a bigger, better store in that catchment in the prior year. But the key thing to bear in mind as you model the business over the coming years, if you model net number of stores, we can share with you that we're not expecting to close any more than 15 more stores over the next 3 years. But the crucial thing is about those 15 stores is that as we close them, it's not going to impact EBITDA. These are stores that break even because in the majority of cases, we've already got a bigger, better store in the catchment, and we're just waiting for the lease to expire. Quick update on digital marketing. This is something that I remain very proud of, 1.5 million Instagram followers, triple that of the U.K.'s largest retailer. We have a certain tone of voice that resonates with our customers. They find it funny. They find it engaging. And frankly, they see it on Instagram, they come into our shop to buy. Even our website, boring old-fashioned website, 84 million sessions in FY '22 despite being nontransactional. Now this was a really pleasant surprise actually over the last 12 months. There's a company called Savanta. We're not involved with them. We haven't engaged with them. This came into our inbox out of the blue. They run an annual survey across U.K. shoppers, 96,000 respondents. And what we found to our delight is that we were ranked ninth best loved brand in retail, ahead of some retailers that have been around a lot longer than us, Sainsbury's, John Lewis, et cetera. What was particularly pleasing was that for home, we were ranked third overall. Now those of you who follow this business for a few years will know that actually 4, 5 years ago, we had a disappointing home department. And so when I talk about B&M has become a better business, that's a great example of where we have become a better business. To be the third best loved brand in the home category is testament to the wonderful work that, that trend, look and feel department, the packaging designers, the surface decoration designers, the buyers, the home controllers, they've delivered. And the other point of detail that's really quite exciting is that the millennials and the Gen Z consumers that are our Instagram followers, they love us. And they, of course, are the families of the future. They're the backbone of the U.K. shopping population that when they have kids and they need to buy toys, they need to buy garden products, the Christmas gifting, they're going to come to B&M. Exciting news on our transactional website trial, shortly launching an online delivery service for our bulkier seasonal products. And when I say shortly, I mean a matter of days. We're going to start off just with the big patio set, the egg chairs, some of the items that you see here on the garden furniture. But then pretty quickly, we ramp up to about 1,000 SKUs. Those are products that are bulky, higher ticket, and most importantly, survive what's called the drop test that we can get them to your house without it breaking rather than so much of our other products, which frankly, the cost of packaging would outweigh the value of the product. We're going to test and learn. We have an open mind as to how this is going to work out. But one thing that is important is that we still firmly believe that the future is the treasure hunt in stores. We enjoyed 252 million shopping transactions in the last financial year. Retail is not dead. People enjoy coming to the shops. They enjoy the browse and they love the fact that every single week, we've got 100 new products to show them. Every single week, we've got price reductions as we cycle through ranges that -- and products that are new or we're discontinuing. So watch the space, it's an exciting opportunity for the future. Let's turn to Heron Foods. So they had a satisfactory performance, a stable year. The second half of the year was better than the first half of the year, where their comps were particularly challenging for obvious reasons. First half of the year, the comps, everyone's at home, everyone's eating more at home. As the year evolved, it became easier. One thing that Heron does differently is it's quite strong on clearance product. So if a factory or a food producer has got out of production, Heron will buy it at a discounted price and pass that saving on to its consumer, its shopper. During the pandemic, there was less of that product around because, frankly, everyone was surprised by the volumes that were going through the supermarkets. That's reverting now gradually to normal, and they are finding that, that product is available again, and that's feeding through into healthier sales. But the big picture is that the business generated an EBITDA of GBP 23 million, which frankly, on a purchase price from a few years ago, represents a multiple, an EV, EBITDA multiple of 7x. So we are perfectly pleased with that acquisition. France is where the really exciting stuff is taking place. I mentioned earlier, all 107 stores are now trading at B&M, and they've delivered a very pleasing -- I was frankly surprised over the course of the year, I was surprised at how quickly it turned into such healthy profit. It generated GBP 35 million of EBITDA and 9% margin, which when you think about the enterprise value of the business that we acquired, that was a great purchase. Really pleased with it, and it's got a long runway of growth ahead of it as we build the competencies within the business, for the business in France to go down the same trajectory that the U.K. business has been going down over the last 15 to 17 years. The crucial thing is that it's now inarguable that the French consumer like the proposition. They like the product mix, they like the pricing and they like the way we present the goods. So what does the future hold in France? The key task at the moment is to transfer best practice from the U.K. to our French colleagues. One of the frustrations over the last couple of years is the travel restrictions. Gareth's team have not been able to send over people on secondment to show them how we do things here, so the best practice transfer. You can't transfer best practice by Zoom. It doesn't work. You need to be in the store. So that's what's happening right now. We have a senior management team colleagues out in France, training, coaching our French colleagues on how we do things so that as we look forward, we're able to ramp up our store opening program. In this financial year, we asked you to model 6 new openings, but the real excitement is in the year after that and the year after that, when as long as we combine the sites, we start scaling up the rollout because there is so much opportunity there. Yes, the French consumer market is a big one, and 107 stores is scratching the surface. But as the final bullet point says, quality, not quantity. We'll tread cautiously, and we will be constantly measuring that the new stores are doing what they're supposed to be doing, achieving the EBITDA margins that we want out of this business. Let me now turn to our balance sheet and our capital allocation policy. You've seen this slide many times before, we are a business that's all about consistency and continuity. Priority one, keep opening new stores. As you heard, every time we open a store, the cash comes back within a year. Priority number two, pay out the full dividend. Full dividend for the year is 16.5p. You'll recall the 25% special dividend on top of that. We are not currently looking at any M&A. We see plenty of opportunity for organic growth, both in our U.K. market and the French market. And so it's just not currently on the agenda. And so what that takes you to is that as you look forward to the end of FY '23, our leverage will be write-down yet again. And of course, the question then arises, how much surplus cash to return to shareholders. Just want to reemphasize, this is a business that's very focused on maximizing returns for shareholders rather than building up a cash power or a war chest. That's just not our agenda. So let me talk about ESG next because it's something that we've been in a lot of work on behind the scenes over the last 12 months. There are 4 aspects to our ESG strategy that explain how we think about it. First of all, the obvious one, the environment. We recognize the obligation upon us to reduce our carbon footprint and indeed to reduce the use of packaging that's made out of plastic. That's all underway. We take a lot of pride on the impact we have on the community in which we trade. We regenerate high streets, we occupy retail parks that otherwise would have voids and we create local jobs. B&M is a great place to start a career if you're in retail. And on the topic of colleagues, we provide in-house training, and we have a lot of work going on behind scenes around D&I, diversity and inclusion. Delighted to share with you that because of the strong business performance over the last 12 months for the second time running, we paid all our colleagues an extra week's wages. Delighted to be able to do so. And then finally, in terms of supply chain, lot of work that takes place behind the scenes and making sure that our factories treat their employees with respect and we're using sustainable or recycled products wherever we can. We're a member of the groceries code I think it's called and -- GCA, and we pay on time. We don't abuse our position with our suppliers. We work in collaboration and partnership with them. When our annual report comes out in a few weeks' time, we'll also be publishing for the first time our ESG report and strategy document, extends to 70 pages. Today is not the opportunity against the detail of that. But I encourage you or your colleagues that are engaged on ESG to please read it. We set out our strategy. We set out some specific targets, and we provide case studies that bring to life all the things that we're doing across the business, whether that's in logistics, in buying or at store level, procurement to make sure that we're acting as a responsible and sustainable retailer. So let's talk about the last 8, 9 weeks at the beginning of the new financial year. So the first thing to explain, as you saw earlier, the comps are really difficult to sort of read through, both on a 1- and 2-year basis. April, beginning of May, huge numbers up against. But on a 3-year basis, we're okay. We're trading okay. The numbers to bear in mind are the ones there on the second bullet point. April was plus 7% on a 3-year basis, and there's an improvement in the first 3 weeks of May to just under 11% like-for-like 3-year basis. So the business is not being into material dramatic reverse. We are a cautious business though. We budget cautiously. And what we're asking you to model is some step back in gross margin because it's not necessarily the case that you have the very strong levels of sell-through that we've enjoyed for 2 consecutive years. What we're asking to model is that somewhere between 70 to 130 basis points of gross margin may have to be given back from a combination of more normalized levels of end-of-season markdown but also potentially a shift in category mix. If it's the case that we're going into a severe consumer recession, we accept that it's probably inevitable that our customers will buy more grocery and FMCG at the expense of toys, home decoration, gifting. In terms of the new store pipeline, that remains robust. What we're saying, as we've mentioned earlier, 40 stores for B&M U.K., 15 stores for Heron and 6 stores at B&M France. For the first time in 8 years since we listed, we've actually decided that we're a mature grownup business, so it's time to start sharing with the market our own internal expectations of group EBITDA. We're asking you to think about an EBITDA outturn for this current financial year somewhere between GBP 550 million and GBP 600 million. And in the context of that pre-pandemic level of GBP 342 million, what that's telling you is that we absolutely expect to hold on to the vast majority of the earnings improvements that have been open to us by virtue of the new shoppers that discovered us during the pandemic. So just to summarize, really pleased with how the team have executed over the last 12 months, both in the U.K. and France, in particular, and France is now looking really exciting in terms of long term. We're well positioned for the current financial year. Our price gap remains the same as it always does and the nature of our products, 93% under GBP 20, and most of them being either essential goods or quasi-essential goods means that we are very well positioned strategically. And when the times are tough, discounters do well. It's an important message to try and share with you. But the big picture is that our strategy remains unchanged and our growth prospects that remain very positive. So with that, I'll turn to questions. Thank you for being patient as I went through that slightly longer than normal, but a lot of material to get through. So let's take questions from the room. Thank you here in the front. Thank you.

Jonathan Pritchard at Peel Hunt. 3 for me. Firstly, do you have an inflation number for the current trading? So what was inflation versus last year? Secondly, you talked about a 50% advantage on price over groceries in the U.K. But in France, what's the gap that you have over the grocers or your competition in general on key categories? And then forgive me if this is slightly old news, but COO, obviously, Mr. Rogers has left. Could you talk me through the -- his departure? And has there been a new arrival or is that imminent?

Yes. I think grocery is the most relevant. Behind the market year-to-date, we're probably in the 4% to 4.5% pass-through to customers. We keep a very tight handle on the supplier negotiations. The price index, as Simon says it's very strong and 15, I think it's a conservative number. So we'll continue to monitor and follow.

And in terms of France, I think the key message there is that food and grocery is not a particularly large part of that business. It's nothing like the percentage that it is in the U.K. And so the more important number for us is the price gap on the general merchandise. And the reason why the business has been successful is because that price gap is about 10% to 20% relative to the competition. We didn't do any advertising campaigns. We didn't make any big splash. We didn't give products away. We just put our prices out on an EDLP basis, and they loved it. They're buying the products. So we have found that the competitive environment in France is actually quite supportive. It's a high gross margin retail sector. And for ourselves with our limited assortment model, it's a good market to be in. In terms of people changes, so yes, our previous operations director left the business, I think, about 15 months ago now, 18 months ago, now? And Gareth is our U.K. Stores Director. And Gareth, why don't you tell a bit about yourself and how long you've been at B&M? I should say that if you cut Gareth in half, he's orange and blue. More B&M than I am. But Gareth, how long have you been...

[indiscernible]

It's a word I've used previously this morning, continuity. It's all about continuity.

It's Simon Irwin at Credit Suisse. Can you just give us a little bit more color about the categories -- category performance behind current trading at the moment, preferably on a pre-pandemic basis? So particularly how your GM categories are going. And can you give us a sense of what kind of sales performance you expect behind that full year EBITDA guidance?

Okay. So in terms of categories, the departments that have performed materially better when comparing to pre-pandemic levels are the general merchandise ones. The standout areas are seasonal. So the reality is that when a customer discovers that they can get their gardening equipment or patio furniture or lawn care from B&M cheaper than the previous place they went, they come back the following year and the year after that. Absolutely the same applies with your Christmas decorations and your gifting. Toys is another good example. The toy industry, I think they awarded us retailer of the year in the year just under review. That's the supply side of the industry. You don't get that accolade unless you're doing something right in terms of the toys that you're ranging the prices, you're selling them at and how you present them in store. So those are the standout performers. And we absolutely expect to hold on to those market share gains on that general merchandise. Home is another good example. And I think that's probably one of the drivers of this, what we say is a structural step-up in gross margin relative to 3, 4 years ago. In terms of the...

I got it. We take halfway, halfway point on the range. We assume a bit of gross margin moderation. I don't think you get far away from flat LFL for the full year at a total business level, give or take a bit. If you think about the nongrocery participation, last financial year, just -- was just about 52%. That probably moderated 100 bps on the prior year. That might tweak a bit, but I don't know if it's going to be substantial. And what I would say if you think about the last 4 weeks, LFLs on a 1-year basis are not far off from flat already.

The insight to share with you is that when we talk about 93% of our products being under GBP 20, the reason why we're thinking about the year has been flat, which at one level, yes, it's arguably disappointing. It's because of the 7% that isn't under GBP 20, the GBP 150 patio set or the GBP 200 tree that's [indiscernible]. That's where we're being cautious. That's where we accept some consumers will pull back. But even if that happens, you get to the midpoint of that range, so somewhere between GBP 550 million and GBP 600 million of EBITDA for the year, which, as we said, is a very material step-up on pre-pandemic levels.

So can I just follow up on your answer to the current trading, but you're basically saying that your -- the general merchandise side of the business is stronger than the food side of the business relative to pre-pandemic levels? Is that what you're saying?

Yes. So if you're saying pre-pandemic level being on a 3-year basis, absolutely the case. But on a 1-year basis, we're sort of thinking note of caution that just looking at everything that's going on in the market, they might be buying more grocery than the nongrocery of the remainder of the year that we're in.

Richard Chamberlain, RBC. Can I ask a couple, please? First on this EBITDA guidance you've given out growth gross margin commentary as well, are you -- does that assume then -- it sounds like you're assuming some sort of normalization of discounting in the year ahead and also sort of negative margin mix effects from this 1 year outperformance of food household versus nonfood. Are you kind of then assuming that you can broadly offset the other cost pressures facing the business?

Correct. Yes. So let's say, 120 bps on gross margin, take time on 2/3 on that mix moderation, that will not fundamentally change the participation of nongrocery and a bit more end of season, not long, which has been nonexistent in the prior 2 years.

Got it. Okay. And just on France, can you just give a little bit more color about what exactly you're doing in terms of best practice transfer because I guess it's already earning a decent margin, the business seems to be performing very well. So what exactly are you transferring? Is it around sort of store expertise, that kind of thing?

Look, that's a great question, Simon, it's all around -- Richard. Look, we've fundamentally changed the business towards an own to run business. So historically, there have been a high degree of delegation freedom in terms of the mandated model. It's building the capability in stores. It's regional skills, leadership, area, competences, processes. Now 2 years ago, this business didn't have a fully-fledged retail operation. Now every single store we open, we operate them. Selectively, we start moving the mix towards own run stores. And that takes a bit of time to get in. Gareth's team is already supporting on the ground. We have 2 or 3 experts already on the ground. Actually, we brought out of our retirement one of Gareth's predecessor -- 2 of Gareth's predecessor a few years back. And it takes a bit of time to -- look the buying side is performing well. I think it's well integrated on the nongrocery. It's just betting those operational costs, including logistics.

And so it's worth bearing in mind that the business that we bought was entirely a franchise model. There wasn't a single store that was operated by the company. Today, it's 27 out of the 107 are company operated, and that number is going to increase.

So how should we think about the -- or how are you seeing the medium to longer term or margin potentially in France because I can see how structurally it will be lower because of this franchise or manager-mandated structure. But actually, obviously, you've got the big nonfood weighting as well. So actually, do you think it could converge towards the [indiscernible] over time?

Long term, I would be disappointed if it's not within a couple of points of B&M fascia. So I would say 10, potentially bit higher. It's not going to get to 13, 14, but there is no reason why it shouldn't be double digit.

Tom Davies from Berenberg. 3 questions for me. So firstly, in terms of the profit algo, like how are you going to balance the growth versus that profit target? Would you prioritize one over the other? And secondly, in terms of the competitive environment, do you feel that that's supported to the gross margin in your coming year? And then third one, why you wait until 2024 to do the space expansion in France? Why not trying to assume that?

Good questions. Thank you. My late father was a market trader. And I remember being 10 years old and having drummed into me. Turnover is vanity. Profit is vanity. If you look at this business ever since we listed, I talk more about earnings and about revenues. Cash profit, cash profit, that's the reality. So yes, we run the business for a cash profit rather than trying to hit some arbitrary sales line. In terms of competitive pressures around gross margin, it's really stable. You look at the supermarkets, they're not looking to go from, I don't know, 4%, 5%, EBITDA margin down to 1%. I don't see that. If you look at the category specialists, they're looking to hold on to that EBITDA margin. So despite everything you read in the papers about chaotic sort of environment for retail, we're just not seeing it.

Look, on the nongrocery side, that price gap is very firm and wide. We haven't seen any indication that we are losing any advantage. And that's even before you get into the quality journey we're having. You're going to grow on the grocery side. I've been here close to 2 years now. I haven't seen a deterioration on our price position as we measure it line by line, whether it's against a discounter or 2 of the major grocers.

On your question as to why wait until FY '24 for the step-up in rollout, I'm going to invite Allison, our Group HR Director, to answer that because the backdrop is that the business that we bought never open more than 1 or 2 stores a year. So this for them is a bit of a shock for system. And so Allison, why don't you talk about the work you've been doing around recruitment, staffing, et cetera?

Hi, everybody, Allison here. Nice to see you. So as Simon has mentioned, from a stability perspective in France, we took over a business that was run all by individuals, no consistency, very difficult to ensure that we're focused on the customer and the end peak. What we found over the last 12 months, having been able to get into France and work alongside our colleagues there, although phenomenal results last year and we are delighted, from an infrastructure and talent perspective, we've got a lot of work to do. Carl, who is Gareth's predecessor, is out there currently with some of our teams. We're very focused on new stores, ensuring that we open them well, but that they continue to trade. So we're very careful to make sure that we have a foundation for growth. Simon would say regularly that when we used to open stores in the early days here, they traded very well, but then we weren't continued in our focus on standards and people. So we just don't want to make that mistake again. So very focused on ensuring we've got the right people. We're hiring to our senior team, which is incredibly important, hoping to hire a new senior retail from a competitor in France. And we just want to make sure that we set it up for success. So this year, 6, 7, next year, 10 and onwards. It doesn't mean we're not looking for properties because we are, and we're making a new hire in the property team over there as well. But we just want to make sure that we're talking about sustained, consistent growth as opposed to a bit of a splash in the pan.

And I think it's also important to remember, this is not a side race. This is a big market. The consumer is there, and we don't see this as a grab for space. There is plenty of opportunity and greenfield in France.

And one of the good things, although we are moving things to company-operated stores. So remember, that's our management team and assistant managers lots of flexible part-time workers, which is pretty unique in France, but we've been very focused on doing that even with our mandated managers. We're engaging them into realizing working in the B&M way is going to be more profitable for them as well. So we're taking those guys along the journey as well, whether it's company operated or mandated.

Very good. I think that's all the questions. Sorry, one last question, Tony, and then we'll wrap up.

Tony Shiret from Panmure Gordon. A couple of things, please. In terms of the overall level of 3-year like-for-like, I just have your slide with the retention of the sort of COVID cohort in my mind. I don't know how big that cohort is in the totality of B&M. I can't do it from memory at my age. But it just strikes me, is it the case that the 7% 3-year like-for-like is all just the new customers that you've got within COVID period? I just wondered whether the pre-COVID guide are actually sort of down on a like-for-like basis, I don't know if you look at it like that? And the second question is about the Bedford warehouse. I just wondered if you could give us an update on capacity usage and if that's affecting the numbers at all in terms of excess costs or whether you capitalize the costs until it gets up to capacity?

So in terms of the components of the 3-year like-for-like performance, it's actually difficult to break out what's new customers, what's the old customers' spending habits because we don't, for example, have a CRM or a loyalty card where you can track who's buying what. I go back to one of the earlier comments I made, what actually changes the like-for-like on a daily basis is the weather. And I know every analyst hates retailers talking about it. But at this time of the year, what you're selling, and that's moving the needle, are patio sets, barbecues, camping outdoor products. It's simply the weather. And so we're not seeing any fundamental change in customer behavior. And what we're saying is that it just all feels pretty normal. And what is undeniable is that we're holding on to these elevated sales densities relative to that FY '20 pre-pandemic period.

Is it fair to say then that you don't monitor customer cohorts very closely?

We don't track individual shoppers' buying habits. We look at what's happening in terms of store basis, category basis and yes, just like-for-like.

To your question, Tony, on Bedford, it's -- I think that DC, clearly, the largest has had a strong operational year, much more stable. In terms of team leadership, recruitment, operational metrics are hitting where they need to be. In terms of the next 2 to 3 years, we don't see any capacity constraints in the business. I think we can drive the volume and the throughput, cost input inflation is not going to fundamentally change the dial on the cost of sale on transport and distribution. And whenever we reach the point where we need more capacity, we don't expect to do it on a greenfield side. It will be revenue expenditure without fundamentally changing the CapEx.

So what is the capacity usage at the moment, 60, 70?

You're not far off. Specifically on your question on capitalizing costs. We never do that, that doesn't happen. It's not part of what we do. And just to finish on this point around the sort of the nature of a discount retailer versus mid-market retailers, at the heart of our competitive advantage is simplicity and low cost. And so actually, I like the fact that we don't have a huge marketing department with points and rewards and all that CRM stuff because, you know what, it adds complexity. That's not a model. You look at Aldi, you look at Lidl, you look at B&M. We don't do that. We don't do high low. We don't reward, it's just simple, honest retailing, and it works. The customer likes it. Good. I'm mindful of time. We've slightly over to 1 hour. So thank you all for listening in and joining us today. See you again soon.

Thank you, everybody.

Thanks.