B&M confirms march of the discounters

Retail’s big week comes to a close on a high with B&M reporting a blockbuster third quarter following the departure of Sir Terry Leahy. The discounter managed to deliver a healthy boost to UK sales as efforts to build its out presence in southern England start to pay off. Crucially, B&M continued to growth UK like-for-like sales at a healthy clip and this marks it out as one the top store-based performers over the last 12 months, although we did not get a repeat of the exceptional quarter-on-quarter LFL sales growth reported in Q2.

Its ambitious store expansion programme is paying off and shows there is still room on the high street for brands that can meet consumers’ needs effectively. 19 stores were opened in the quarter and a net 32 in the year-to-date, helping to lift total group revenues by a robust 22.7%.

To put that in context (although it is not exactly comparing like for like, there are clearly parallels to be drawn), this was ahead of Lidl (+16%) and Aldi (+15%) in what is increasingly competitive discount market driven by store expansion. What the updates from all three confirm, however, is that the market seems to be supportive of value-based retailers and all three continue to build market share.

Stripping out the effect of new openings, like-for-like sales were also very positive. UK LFL rose +3.9% on the year ago period. Although it must be noted that sales growth is slowing after a bumper quarter a year ago when LFL UK sales rose +7.2%. This comes off the back of a strong first half when group revenues increased by +21.7%, while LFL revenues in the UK rose +7.5%. Again this highlights a slowing in growth in the third quarter that may raise eyebrows among only the most pessimistic watchers of this stock.

Recently-acquired Heron frozen foods delivered almost £80 in revenues with what management described as ‘strong’ LFL growth. Sales at Jawoll’s in Germany were up 8.2% on a constant currency basis, which equated to a +10.4% gain in sterling terms and was ahead of the H1 performance.

There are ambitious expansion plans in place and the outlook appears very positive, although like other discounters margins may come under pressure and there is probably a ceiling to growth. Profit guidance is unchanged, which given the robust performance and store expansion could produce an upgrade later on.

Bovis turnaround on track and accelerating

“Yet more encouraging results from Bovis Homes today confirm what we always suspected - that the problems with build quality and contractors could be easily fixed and Greg Fitzgerald was the man for the job.

Profits are in line for 2017 but it now expects a significant improvement in profitability in 2018. Industry fundamentals remain supportive and with the old troubles now fixed, Bovis can focus on the kind of disciplined growth that will deliver for shareholders. As consistently noted in relation to housebuilders, these are easy pickings. The market could not be more favourable with low interest rates, high employment, low supply and high demand. Bovis was at risk of missing out but it seems to have caught up.

Coming so soon after the update of Nov 14th, it is impressive to see balance sheet health improving so rapidly. Having guided net cash to be around £100m at year end, up from £38.6m a year before, management can now boast of a £145m year-end net cash balance. It’s been selling off assets to boost the balance sheet, including releasing £30.5m from five land sales, all of which is consistent with its plan to reduce the land bank to 3.5-4.0 years.

Although no detail was given margins should improve in 2017 having fallen way behind the industry to 15.2% last year. This is necessary and it seems all the steps being taken by management are will be positive for margins. We note for example that it remains on track to deliver on a target of overheads at a maximum of 5% of revenue in 2018. Meanwhile average selling prices rose 7% (9% on private sales), which is partly down to the market and partly down to changes in the mix of homes being delivered. Forward sales look good with total forward sales of 2,656 units worth £518m.

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