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

[Audio Gap] I'm here in Liverpool and speak with Mike. And we have Dave McCarthy as well on the call. So I will just kick off with a couple of minutes of highlights to give you a bit more color for me and then we can go straight into Q&A. So look, I am pleased how the business has traded in the key quarter. LFL 1.2%, as you know, to December 30. I will just highlight two or three bits of why I feel it's been a strong profitable performance. So similar to half 1, half of that LFL performance was positive transaction numbers. And that's pretty much the same dynamic that we had in half 1. And actually, what that means is that the level of inflation is virtually nonexistent in that LFL number. And that actually we can see that in terms of volume. If I look at the level of our logistics and warehousing at B&M U.K. during the golden quarter, actually, we have shifted higher volume year-on-year, quarter-on-quarter compared to prior year. So the volume in the business has performed very well. That has driven the LFL transactions. And fundamentally, the two sides of the business have remained in nice balance. I am very pleased with general merchandise in the golden quarter. It's been comfortably ahead of 51% of sales, to give you some idea in terms of sales participation. And there are some categories that have performed incredibly well. I mean, I'm not going to get into too many numbers. But just to give you three or four of them on general merchandise that have been either mid-single-digit positive LFL or almost and some of them double-digit LFL. So homeware, a key category, high single-digit positive LFL. Paint has been particularly strong. I suspect we have taken quite a bit of market share from Wilko. Paint specifically actually was almost 20% of that. So I'm very pleased about that. DIY, very strong, stationery very strong. So overall, general merchandise performed well. I mean, the volume was shifted profitably. It was positive. And the FMCG side was also very strong in the quarter. You know that on an underlying basis, where it's against last year or 2-, 3-, 4-year LFL basis, 1.2% LFL is the strongest quarter this financial year on an underlying basis. And it's pretty much what I expected we could do when we last met in early November. So pleased about that. So the key message from me, volumes were positive year-on-year. And that has actually leveraged the whole cost base of the business nicely. A second point, which actually I'm very pleased, standards. It's the second Christmas I have traded now on this journey. The business continued to step on in terms of availability, very strong. The teams on the ground, very engaged, has awarded a high proportion of store managers their extra incentives that we have spoken in the past. So the mood and the tone in the business is very, very good. And actually, on a soft measure, I'm also pleased to say that this is the second consecutive year in a row that my retail staff turnover that people actually materially decreases year-on-year. So the level of retention in the business is actually quite strong. Property, I am upgrading, as you know, the level of openings at B&M U.K. This year, we're going to open 45 stores to March. The outer 2 years remain unchanged, so no less than 45. And to give you some color on the 45 of this year, roughly that's almost 1 million square feet of selling space that we are laying out in the U.K. B&M. And that excludes Garden Centres. That's a hell of an opening program, and the quality of those shops are in pretty good shape. The two smaller businesses are trading well confidently. So in summary, we are exiting the quarter where I wanted to be. I will continue to shoot for the higher end of the range. That remains unchanged as we spoke back in November. And look, it's all in good form heading into the next financial year. So high-level summary, and we can go straight into questions.

[Operator Instructions] And now we're going to take our first question, and it comes the line of David Roux from Bank of America.

Just three questions from my side. Just going back to your point on the new stores this year, can you tell me how many you will close across the regions? And then the second point is on freight. Can you talk about the potential impact from higher freight spot prices and perhaps remind us how long your contracts are and how big freight costs are to the group? And then just some more detail on the 14 weeks for the period versus 13 last year, I mean, is there a similar comparison? And if so, can you expand on that?

Yes. So the first question, think about 45 gross openings, that's roughly 1 million square feet. I will probably be closing very small, tiny ones, which is normal part of our allocation, probably in the order of 10 to 11 for the full year. That's minimal in terms of footage. That's normal in terms of our recycling of assets. So all of this is accretive as normal. In terms of freight, look, we have a good contract in place, as you know. We are not really exposed. Clearly, we continue to monitor the situation. But I can confidently say that the flexibility we have in our supply chain and contracts, I don't expect any impact for us in terms of availability on shelves. We have sufficient headroom in terms of buffers and timings. So basically, the stock is moving exactly where it needs to be. So I'm comfortable with that. The stock is flowing nicely. We have the right line of sight in terms of flexibility. So it's business as usual for us. The supply chain for us is very resilient. We shift volume growth first in the queue. We've proved that pre, during and post pandemic. Remind me, David, your third question. I don't know if I answered it.

Yes. So just a bit of color on the calendar impact, 14 weeks versus 13 last year?

This is actually quite straightforward. So the reason 1 quarter is 1.2%, 14 weeks is that Christmas Eve was in Q3 last year. And basically, it falls into Q4. It's not the main date for us. We tend to peak earlier basically in the run-up to Christmas. And if you look at the research note of work of [indiscernible], he's probably on the money in terms of his assumptions. The two are not that different. So 1.2%, 14 weeks for me is the underlying LFL performance on a comparative basis point.

And the next question comes from the line of Jonathan Pritchard from Peel Hunt.

On the new stores, the slight nuance that you're opening 45 slightly less this year, what's happened there? Is that just a few more Wilko type of stores, you've agreed terms with landlords and that's come forward and then you're just sort of filling in at the far end? Just why is that sort of year 1 number a bit higher than we thought? Perhaps a bit more color on France, both on the new store opening pipeline and a sort of current trade perspective, just a bit more skin on the bones there. And an easy one for Mike. Just why now give the special?

So yes, you are right. I think Wilko is coming nicely together. And I think we are well advanced on the negotiations. I think 45 is a good number. I always try to underpromise a bit and overdeliver if I can. That's what we have done. I'm confident now that we have good line of sight. And I think those 45 fundamentally puts us in a very strong position, Jonathan, heading into the next financial year. So operationally, I think we can handle it well. They are the right size. And it doesn't compromise the ambition we have for the next 2 financial years. France is trading nicely. I think the guys have had a good execution in the golden quarter. The business is trading well. Both FMCG and general merchandise, they have exited again very clean, the same as us at B&M U.K. So the guys are confident heading into Q4, 11 store openings is good. And I'm going to increase the number, with discipline into the next financial year as always. Mike, and in terms of the question from Jonathan?

Yes. So on the special dividend, Jonathan, as you know, we're through the key trading periods for the year. As Alex has already said, the stock position that we're exiting that period with is very clean. And I think the cash generation for the business has been good as expected. And we've got the discipline in terms of our capital allocation approach. So we're returning excess capital to our shareholders with the aim of staying in our 1 to 1.5x target operating range at the end of the financial year on an underlying basis. And leverage will be flat on an underlying basis at the end of the financial year.

And the next question comes from the line of Richard Chamberlain from RBC.

Yes, a couple for me, please. What's your assessment of how the sort of collapse of Wilko impacted B&M and the discount sector sort of during the quarter? Was it overall maybe a bit of a negative because of the amount of promo and disruption going on? I'd just be interested in that. And then second, I think you called out homewares in your new opening preamble, you called out homewares. And I think, in particular, paint has been very strong categories. And were there any categories where you felt you could have done with a bit more stock over peak? Or was actually the stock position pretty robust through the period?

Yes, good questions, Richard. So Wilko is too small to make any material impact for us. I think where they were particularly strong, homeware, stationery, paint, I suspect that we have taken a good share of that. And we're going to dial that up even further heading into next financial year. Look, there wasn't always -- they were clearing a bit. But at the end of the day, it's GBP 1 billion-plus business on a GBP 200 billion-plus, as you know, [ camper ] market. So it's not big enough to make a share. But in some of those sites that basically we are opening, I think we are going to dial up on those traditional categories quite hard. So that gives me quite a bit of confidence that general merchandise continues to trade fairly robustly. On stock, no, we're fine. We've exited clean. I wouldn't have bought anymore. You've heard me before, we're always going to buy to trade positive LFL. I don't buy to shift or to trade inflation, I trade volume. I've made it clear that golden quarter, the volumes we have had compared to prior year have been positive. So the quality of that LFL, which is measured on transactions and units moving through our network, is what leverages the business. Now look, if you take the high end of the range at GBP 630 million and you know that I don't shoot for the midpoint, I mean, let's remember guys that in the last year before the pandemic, this business used to make GBP 330 million, GBP 340 million. And the business has been able to structurally increase its level of profitability through volume. So no, I was happy with the stock position.

And the next question comes from the line of Adam Cochrane from Deutsche Bank.

Two questions, if I can. Firstly, on the performance of things that you called out kind of general merchandise in there, not much of a mention of food, I can assume that if you called out general merchandise, food has maybe been slightly weaker. Is this reflecting a comparison issue from last year or a decision maybe to focus on margin rather than sales performance in the food category, so a little bit of a discussion on the food side? And then secondly, looking at this wage and costs into next year, can you just remind us on whether you have to pass through all of the, let's say, 10%-or-so minimum wage inflation? Or you have some kind of buffer that your wages are already above it and you won't necessarily see the whole 10%?

Thanks, Adam. Look, FMCG has performed very strongly on volume. We are very sharp on EDLP. I'm very happy with the price position. We don't get into any high-low loyalty dynamics. It's pure price. The volumes have been positive. The LFL has been positive. And any suggestion that I will actually not drive that side of the business, it's not what we do. The business is in balance, the two sides of the business, and it has performed nicely. I will bring it back to the quality of the LFL, that LFL is leading in terms of volume. I am not moving inflation. And that shows in the bottom line. So I'm comfortable with the performance of the two. The one that surprised me actually how strong it was, so the two performed well, but general merchandise was very strong as well, which is an important point, which tells me, Adam, if the price is sharp, availability and standards are fine, the consumer sees that and the consumer [indiscernible]. In terms of national minimum wage, look, it's the same dynamic as this year, we will always have a productivity plan in place. It's not going to fundamentally change our cost ratios. On the business, B&M U.K. will continue to trade every year in the 12% to 13% EBITDA margin. I never shoot for the 12%. I always shoot for the higher end. And basically, the fundamental difference between those two points is the level of markdown. So no, I think the cost lines and the cost to sell are going to be good. If you take logistics as an example, in the current year, those inflationary inputs have been in place, but the level of productivity of the business is where it needs to be. And why is it where it needs to be? Again, it's because we're moving boxes and we are not moving inflation. That creates a lot of fixed cost leverage in the business. This is a volume play, okay?

Yes. And then in terms of food performance, if the overall is around plus 1% and general merchandise is positively surprised, we're saying that if food is still a positive like-for-like number, there can't be much difference between the two. Is that reasonable?

I'm not going to give you the exact LFLs of the two numbers, you know we don't disclose that. The baseline of last year was very high. At 1.2%, what I can tell you is that the two have performed well and FMCG was particularly strong as well in terms of volume. I think I'll keep coming back to the point, there is no inflation oxygen on that number.

And the next question comes from the line of Nick Coulter from Citi.

Just a couple if I may, please. Just on U.K. space, would you be able to share that the U.K. space impact on either kind of a 14-week or a 13-week basis, please, and then perhaps confirm how many U.K. stores you anticipate opening in the fourth quarter? And then a follow-up, if I may, just on the outlook. I think that at the half, you talked to needing a low single-digit like-for-like to hit the guidance range. Does that still broadly hold true for the fourth quarter as I guess you're kind of running into a much softer comp on whichever basis you want to look at it?