The B&M European Value Retail S.A (LSE:BME) share price is up 5% after the company’s latest trading update. And it’s not hard to see why – revenues are up and margins are looking strong.
Like-for-like sales – a key metric of profitability for retailers – came in lower than during the previous year. But the market has responded positively to the news and I think it’s right to do so.
Revenue growth
The headline news was that the B&M’s overall sales came in 2.4% higher than the previous year. This is good, but investors should pay attention to where that increase has been coming from.
B&M’s revenues are a function of two things – the number of stores and the average sales per store. And a closer look at the latest results indicates a mixed picture.
The company’s store count has been increasing, which is a positive thing. The business opened 19 new outlets in the last three months and is aiming to increase that to 45 during the next three quarters.
Like-for-like sales, however, actually declined. B&M attributed this to unusually bad weather during April and May, but investors should note that the latest news isn’t universally positive.
Same-store sales
For retail companies, growing like-for-like sales is very important. Increasing revenues by opening new outlets generally involves acquiring or leasing new premises – and this can be expensive.
Selling more stuff out of its existing stores, however, doesn’t incur these extra costs. As a result, increasing same-store sales can be a key source of profitable growth.
Arguably, B&M’s latest results indicate just how risky retail can be. A key part of the business is having the right products at the right time and the weather – which can be notoriously difficult to predict – can make this hard.
It’s also worth noting that the UK’s weather (at least where I live) has been pretty bad in July as well. So from my perspective, there’s a genuine danger of the issue persisting into the company’s next trading update.
Expansion
The stock market, however, is ignoring this and sending B&M shares up. And I think it’s right to do so – this looks like a short-term issue and the long-term picture is much more encouraging.
The company’s expanding store count should be a durable benefit for shareholders. The outlets it has opened – and is continuing to open – should be around for the long term.
One way of looking at the latest news is that it’s a sign of strength that B&M has been able to keep growing its revenues even during a period when like-for-like sales have been under pressure.
The latest boost to the share price takes the stock to a price-to-earnings (P/E) ratio of around 13. For a company with long-term growth potential, I think that’s still good value.
Should I buy the stock?
I’ve been an admirer of B&M European Value for a while. I like the industry in which it operates and it has a genuine point of differentiation that I think its customers value.
It’s easy to think the opportunity has passed when a stock goes up 5% in a day. But if I had cash to invest, I’d be looking to buy B&M shares at today’s prices.
This post was originally published on Motley Fool
