B&M European Value Retail SA

LSE:BME

Earnings Call Transcript 2019-Q1

[Operator]

Hello, and welcome to the B&M Retail Q1 Trading Update Analyst Call. [Operator Instructions] And just to remind you, this conference call is being recorded. Today, I'm pleased to represent Simon Arora, CEO; and Paul McDonald, CFO. Please begin your meeting.

[Sundeep Arora, CEO & Executive Director]

Good morning, everyone. Welcome and thank you for joining B&M's Quarter 1 Trading Update Conference Call, despite the disappointments of last night's football results. But moving on from that, I'm of course joined by Paul McDonald, our CFO, I'm Simon Arora, Chief Executive. I'm also joined by Steve Webb, our Investor Relations Director, and we'll follow our usual format of a few opening remarks from myself and then we'll be pleased to take your questions.So overall, it's been a strong quarter and a pleasing start to the new financial year. All 3 of our fascias enjoyed good trading and of course, we're the first to acknowledge that that's been helped by the settled warm weather of the recent weeks.Starting with the U.K., our core B&M fascia performed well, and that was despite truly demanding comparatives last year, when you'll recall that we had a very strong first half.Of particular note, I'd ask you to acknowledge that Easter this year fell in week 53 of the previous FY '18 financial year. So this quarter, we've had no benefit from Easter week, compared with last year, and therefore, today's 1.6% positive like-for-like number is particularly good against that background. Again, I remind you that last year's tough comp was a plus 7.3% like-for-like. Importantly, the underlying plus 3.6% first quarter like-for-like, which backs out the Easter effect demonstrates that our value proposition continues to win in a challenging and competitive market. The way we backed out last year's Easter week is really straightforward. We simply state the like-for-like for the other 12 of the 13 weeks in the quarter. It's important to note that the like-for-like growth is coming from a healthy combination of both new customers, in other words footfall, but also an average -- a higher average spend. In terms of product categories, we've seen a strong performance from gardening and outdoor leisure. Actually, we've seen a very good rate of sell-through on those seasonal products to the extent that we were largely run out of stock early in this first half, and actually that means we'll exit the season very clean, which bodes well for the first half gross margin.Turning now to Heron, our convenience store business. That enjoyed yet another strong trading period. It delivered mid-single digit like-for-like growth coming on top of really strong growth last year in the period immediately up to our acquisition of that business. I'm actually delighted with how the Heron business is performing and would like to register credits for the -- a team there for absolutely delivering on what they said they would do.Turning finally, to Jawoll, we've again seen good progress and the new team is now fully in place and on top of the tasks we've set them. In contrast to last year, the weather in Germany has been a positive factor in terms of helping the business deliver, and it's delivered both positive like-for-like and total revenue growth, and the teams are very focused on continuing to drive the change in our product offer, as we prepare for the important autumn/winter ranging reset.It's too early to judge the performance of B&M sourced product in the evolved business. A proof-of-concept won't really be possible until well into quarter 3, and we'll, of course, report on that progress when we speak to you early in the new year.So overall, a pleasing quarter despite the difficulties in the broader retail environment. B&M is clearly a winner in the current marketplace. The weather has of course helped us but the day-in day-out execution by our buying, our supply chain and our retail teams has never been better. And I believe that's a key driver in the performance that we're reporting this morning. I thank all our colleagues in those different parts of the business for their efforts. So with that, perhaps we could turn to some questions. Thank you.

[Operator]

[Operator Instructions] And the first question comes from the line of Jonathan Pritchard from Peel Hunt.

[Jonathan Pritchard, Retail Analyst]

Three, if I may. Firstly, maybe one for Paul, is there a sort of range you'd like to give in terms of full year gross margin accretion, obviously, the mix has been -- or sorry, the south has been very good in the first half -- first quarter. So is there a range you would like to give on gross margin? Is there any difference rates, obviously same day [ effects ] and they're down this morning struggling. Is there any difference between your performance, you are sort of out of town and in town? Is it the sort of smaller bargain store's in-town that are doing better than the apparently footfall less retail parks? And just an update on the frozen [ aceware ] within B&M's, please?

[Sundeep Arora, CEO & Executive Director]

Certainly. Paul, would you like to set the first question on the full year gross margin outlook?

[Paul Andrew McDonald, CFO & Executive Director]

Yes, morning, Jonathan, and morning, everybody. Yes, in terms of that, I think as Simon said, you know we've had a pleasing start to the year. The sell-through has been good. I think the full year results reindicate the margin might be -- that this year might be flattish to maybe sort of 10 to 20 basis points positive. If you think back at some of the factors that impacted our margin last year, one of which was the mix moving from general merchandise much more towards FMCG, and certainly in the first quarter, we've seen that mitigated. So I think a range of maybe flattish to sort of 10 to 20 basis points improvements.

[Sundeep Arora, CEO & Executive Director]

Jonathan, turning to your second 2 questions. In terms of our positive like-for-like training performance relative to some of others in the market, I think I make 2 observations. Firstly, of course, we don't sell the very high ticket items that consumers may be cutting back on, given the macroeconomic environment. And then secondly, B&M really does have something for all seasons, so frankly when the weather has been as good as it currently is, we have a very strong outdoor living proposition, outdoor toys such as paddling pools, water pistols, tools to barbecues and picnic wear whereas -- and other retailers might be much more focused on the inside of the home. And then thirdly on your question around footfall. We're actually not seeing any issues there. We're enjoying positive like-for-like footfall growth both in town and out of town. And I think that speaks to the fact that we are increasingly becoming a destination for the important seasonal categories, be that outdoor living in the summer or hopefully, as we think about the golden quarter and toys and Christmas decorations.

[Jonathan Pritchard, Retail Analyst]

And just a quick update on that, I think 70 or 80 stores that have got the frozen food in?

[Sundeep Arora, CEO & Executive Director]

Certainly. So I think we mentioned that the full year that slightly frustratingly we have to pause for breath once we've got to about 70 to 80 stores. We've done that because we're now waiting patiently for our own chilled and frozen distribution capacity at our new Bedford depot, where I'm pleased to report we've now broken ground. But overall, the trial is working well and what we reported is unchanged, which is that we're finding that the introduction of frozen and chilled is delivering about a plus 5% boost to the stores like-for-like performance through repurposing the space that was previously given to bulky furniture towards that frozen and chilled proposition.

[Operator]

And next question is from the line of Adam Cochrane from Citi.

[Adam Gareth Cochrane, Director]

Just 2 questions from me. First of all, you mentioned about the full price sell-through. Given the way that you order your stock in advance et cetera, is there a risk that you don't have enough stock to fulfill demand as you go into Q2? Or is it really that once you've bought 1 paddling boat that's subject to wearing out, you don't buy another one, therefore, there is no real loss to sales there? And then secondly, in terms of the stores, you've given a slightly slower rollout for H2 '18 than maybe we expected. Given the property environment that is around at the moment, is there still a chance that you can find more stores to open up or that more likely fall into next year?

[Sundeep Arora, CEO & Executive Director]

Good morning, Adam, and thanks for those questions. So in terms of full price sell-through of gardening and summer leisure, you're absolutely right, that once we sold our stock, we've sold it, and those sorts of products aren't available for increased volumes because of the lead times out of China, where these products are made. And so yes, that does mean, that as we think about Q2, we are going to have face a little bit of a headwind around that in terms of turnover, but the way we can counter that, of course, is just by bringing forward the deployment of some of our autumn/winter ranges for the home. So we'll probably see a bit more of that earlier in our stores than this time last year. And that's certainly a case on turnover, but I think for us, what's more important is on the gross margin, we won't be having quite as intense a July/August clear out of modest overstocks of gardening product that we saw last year when, frankly, the second half of the summer was a little bit soggy and wet.Moving to your question on new stores. It is the case that the program this year is second half loaded. That's just a way it is, the reasons for that are just very site-specific around utility connections, builders finishing their works, and some of the people who are -- some of the other retailers that are selling us some stores, have to go through 90 day consultation periods with their employees as part of their store closures. So it's just very site-specific issues rather than macro issues. But certainly as I look for the pipeline for the full year, we are very confident of opening between 45 and 50 net new stores and certainly the pipeline for next year is also looking healthy at the moment. We tend not to want to open too many stores above that, even if the opportunities are there, and one reason for that is that it really does allow it to be a buyers' market in terms of the negotiation between our property teams and prospective landlords. I'll share with you that as we looked at the estate of Poundworld, which was a similar retailer, albeit importantly different in terms of its emphasis on single price point retailing, but as we looked at the store estate of Poundworld, we were astonished that some of the rents of that business had agreed to pay literally of the hundreds of stores they had, there were no more than a couple of percent of those stores where we thought they were paying the right rents. And I think that speaks to the mindset that they've got themselves into, which was open as many stores as possible quickly and the landlords know that and therefore, end up paying rents that we wouldn't consider sustainable. Whereas we take a more disciplined approach to our store opening program, limit ourselves to about 50 stores a year and very much find ourselves in a buyers' market. Should we move to next question?

[Operator]

Next question is from the line of Warwick Okines from Deutsche Bank.

[Warwick Okines, Research Analyst]

I have got 2 questions. Actually firstly, just following up on that question on stores. Could you maybe just give us an idea of how many net additions you expect at B&M U.K. in the second quarter, just to get a sense of quite how back-end loaded the plan is? And second on the gross margin, it's clear that all things are pointing positively, that the general merchandise and the food mix, currency and also the markdown rates. Just so I understand, is there an expectation from you that the first half gross margins should be better than that, the full year guidance that Paul gave or are you really signaling that you've made a decision on price investments and that you're investing a lot of the gains and benefits back into price and therefore, there is no chance that you'll exceed that number?

[Sundeep Arora, CEO & Executive Director]

Paul, would you like to take the first question on the gross margin?

[Paul Andrew McDonald, CFO & Executive Director]

Yes. In terms of the stores, given the size of carrier and the size of store openings that we do, Warwick, I tend to think if you think about the full year, actually, in terms of those, there are 45 to 50 gross openings, and in the -- of those openings we're going to get about 50% of the annualized sales in FY 19 as being the measure and that's the figure that we're trying to look to rather than an absolute number of stores. So I think in terms of modeling, 50% of the revenues in FY 19 would be the right figure on the 45 to 50 stores.

[Sundeep Arora, CEO & Executive Director]

And in terms of gross margin, Warwick, I think as we think about price investments, our starting point is that we just need to maintain our price gap and our relative positioning, relative to the majors, and we will always put that as a priority. But leaving that aside, as we think about the year, yes, I think some of that outperformance on gross margin will be first half loaded, specifically, because of the fact that we've had such a clean sell-through on seasonal product gardening and outdoor leisure.

[Warwick Okines, Research Analyst]

And am I right in thinking that currency benefit is bigger in the second half than in the first half?

[Sundeep Arora, CEO & Executive Director]

Yes, it will be. And the reason why I'm being a little bit reticent on gross margin for second half is, of course, that a lot will depend on how well our toys and Christmas decorations ranges are received. They are obviously very important to the second half in exactly same way that the garden and outdoor leisure are to the first half, and you know I don't want to -- one doesn't know until September/October as to how those are going to be received.

[Operator]

Next question is from the line of Simon Irwin from Crédit Suisse.

[Simon William George Irwin, Director]

Couple of questions for you. Firstly, can you just talk a little bit about B&M ranges going into Heron, I kind of noticed that you've got quite a lot in there already. Is that done or is there anything that say there's more opportunity to sell as part of your ranges through the Heron estate? And secondly, can you just talk a little bit about the benefits you are seeing in stores where there are closures nearby, kind of thinking about obviously toys, where we've seen, for example, some home-based closures already and obviously, Poundworld as well?

[Sundeep Arora, CEO & Executive Director]

Certainly, good morning, Simon. So in terms of the deployment of B&M into Heron, that is now largely complete. It was a core part of our acquisition strategy for that business to improve their ambient grocery offer, in that we already, obviously were very active in ambient grocery and we felt that we had better brands and better prices, that were immediately available to deploy in that business and that's what we did. And that now is coming up to being annualized over the next 2 to 3 months. At the margin, we are still deploying some alcohol offers in some of their larger stores, but for the majority of that estate in the Heron estate, they simply don't have the room to take yet more B&M product, but not withstanding that, we're very happy with how it's trading. I'd reference, of course, the fact that convenience retailing, generally, is in a good place in the U.K. It seems to be enjoying some structural growth versus the large hypermarkets, which remains, I think, a little bit challenged. Turning to your question on closures and other retailers struggling. Yes, we would acknowledge that some of the performance we are currently enjoying is, of course, being driven by the absence of Toys "R" Us in the U.K. now, and that certainly bodes well for the Golden quarter where we've got high hopes, indeed, for our toy department.

[Simon William George Irwin, Director]

And specially, around Poundworld and Homebase, you're seeing anything at this stage or is it too early?

[Sundeep Arora, CEO & Executive Director]

So it's too early. Homebase aren't yet actually closing many stores, and just a small number to start with. But in terms of Poundworld, again, that's still in stock clearance mode, but actually we don't have that many stores that are directing next to a Poundworld, not that many that would actually change our overall company performance. I think one of the relevances of Poundworld's departure from the market is that it takes away a hypothetical or a potential future competitor, in that they did have a trial format, it's called bargain buys, which got to about a dozen stores and being candid bargain buys was a straight copy of the B&M format in that it was generally multi-price and active in all the categories that we're active in. And the fact that Poundworld, we think, won't exist in a few months' time, it is certainly positive from that small perspective.

[Operator]

Next question is from the line of Tushar Jain from Goldman Sachs.

[Tushar Jain, Research Analyst]

I'm going to do straightforward questions. Just following up on Simon's thing on Poundworld. I mean, clearly not seeing any major impact but would you be interested in the shops -- high street shops of bargain buy. I do understand you just said you maintain 40 to 50 stores, but is that something one of opportunity you would be looking at? And second thing, just wanted a clarification, when you're talking about the following next year's store opening being healthy, are you talking both for the U.K. and Germany or it's only for the U.K. and Germany probably will take a decision post Christmas?

[Sundeep Arora, CEO & Executive Director]

Good questions. So in terms of the Poundworld estate, there are probably only a handful of stores that we would want to acquire from the landlords of that business, but I think I'd emphasize that the rents that we would be paying are very different to what they were previously enjoying from Poundworld and literally I'm talking about as a 30% reset in the rents that we'll be prepared to pay versus what that business was paying previously. And then in terms of the store openings for next financial year, it's both the U.K. and Germany. We haven't stopped looking for new stores in Germany. We perhaps turned down the dial slightly, just out of prudence and certainly we have the colleagues and the resources available to turn it up again in January of next year, should we make the progress that we're hoping for.

[Operator]

Next question is from the line of Ben Hunt from Investec.

[Benedict Anthony John Hernaman Hunt, Research Analyst]

Just wondering if you could give a bit more color on the performance of homewares, given that they are outselling from other retailers. And secondly, for Paul. In terms of your hedging for the year's solace, can you give us an idea of where you are averaging in this year?

[Sundeep Arora, CEO & Executive Director]

Ben, in terms of homewares, which I think was the question, we would acknowledge that the homewares market is sluggish. But I suppose for us what remains to be seen is whether that's because our shoppers are spending their money on outdoor products. So of course, and if you're on a limited budget, and what you want now are -- is a new patio set or a paddling pool or a barbecue, and if you're on a limited budget, that's going to be the priority as opposed to new bed linen or cushions or curtains for the spare bedroom. So what's the space? I think, only time will tell. Paul, would you like to pick up the question on the hedging?

[Paul Andrew McDonald, CFO & Executive Director]

Yes, certainly, Simon. Yes, we're hedged up for around about a 1/3 of 10 months now and if you look at our kind of average hedge rate, it's round about 135, 136 at the moment.

[Benedict Anthony John Hernaman Hunt, Research Analyst]

And remind me what it was last financial year?

[Paul Andrew McDonald, CFO & Executive Director]

Yes, across the year we were probably closer to the around $1.30 across the whole year actually, given the mix of the product. So there's a little bit of a theoretical tailwind there, but equally that the likelihood is that actually that will be reinvested in pricing and actually rather than anything else.

[Sundeep Arora, CEO & Executive Director]

And I think on that note, I'll just remind the audience that our mindset on pricing is cost-plus, as opposed to trying to maximize the price we can charge consumers. Effectively, our prices are our advertising, and this is a business that, in the quarter, has spent 0 on advertising and it's all built on word of mouth and that's why our mind-set is, what is the lowest we can charge for this product as opposed to what's the most we can charge for this product? Should we move to next question?

[Operator]

And next question is from the line of Tony Shiret from Whitman Howard.

[Tony Shiret, UK General Retail Analyst]

The question really on FMCG. I wonder if you could confirm whether in the B&M stores FMCG was actually positive like-for-like. And if you could comment on the difference in the FMCG performance versus the Heron like-for-like. And as part of detail of that, if you could also tell us what food price inflation you saw within the 2 sets of figures?

[Sundeep Arora, CEO & Executive Director]

Tony, so yes, as we think about the quarter, grocery in FMCG was positive like-for-like, and given the weather, you'll be perhaps some surprised to hear that the strongest performances were from soft drinks and alcohol, probably helped actually also by World Cup, of course. And in terms of inflation, we think there's very little because we've annualized the Brexit, the post Brexit currency changes. So probably not -- probably less than 2%, I think, in terms of food pricing, so it seems very stable at the moment. Anything else, Paul, you'd add to that?

[Paul Andrew McDonald, CFO & Executive Director]

No, thanks, not right now, I think that's – yes, that's right. And obviously, just a point around Heron as well, so...

[Sundeep Arora, CEO & Executive Director]

Yes, well Heron of course, we acquired that business in July/August of last year. Its current performance is very pleasing, but it was trading very well before we bought it. It's coming up to a tough quarter because the new ranges we deployed around September of last year, so when we get into September, we've got some tough numbers to beat, but in terms of the underlying health of that business, we're very happy with how it's performing. And yes, it's probably doing a little better than the core B&M business.

[Operator]

And next question is from the line of Andrew Porteous from HSBC.

[Andrew Ian Porteous, Analyst, European Retail]

A couple for me. Most of mine have been answered already, but if you could just talk about Germany. It seems like trends are a little bit better there. How much of that is down to what management has been doing in terms of the turnaround and how much is down to just another solid seasonal performance there because I know garden equipment is quite important there? And then just in terms of Heron, are you seeing any greater opportunities to open stores? It feels like that the multiples have sort of taken their foot off the gas a little bit when it comes to convenience openings. Is that creating a few more opportunities for you there?

[Sundeep Arora, CEO & Executive Director]

Andrew, good questions. So in terms of Germany, I think I first will acknowledge that this quarter, they were up against relatively soft like for likes because it -- the summer season was just a washout last year. So they've had a good performance on gardening, but obviously, once again, like the U.K. business, once you've sold it, you sold it, so that isn't something that will continue through the rest of the summer. What I'd credit the team with doing there is that they've been working very hard and very successfully on the shift in the supply chain from German wholesalers to the B&M way of doing things, which is a much greater emphasis on direct sourcing. And a large, a very large amount of effort is being taking place this last 3 months now on our German buying colleagues working much closer with our factories in Asia to set ourselves up nicely for the autumn/winter season with a very different product proposition. Less clothing, less footwear and much more direct-sourced toys, housewares, DIY from B&M supply chain. Turning to your question on Heron, I'll remind the audience that Heron this year has been set the task of opening 20 new stores and as I think about my last update meeting with the property team at Heron, they are more than confident of meeting that number, and actually there is some risk to the upside on a number of openings slightly above that 20 target, that we set them at the beginning of our budgeting process.

[Andrew Ian Porteous, Analyst, European Retail]

One quick follow-up if I could as well. We've seen another big range reset from Tesco. Looks like now they're sort of walking away from some supplies rather than just certain parts of their ranges. Are you seeing opportunities to bring in new supplies and improve the overall quality of your grocery offer because of that?

[Sundeep Arora, CEO & Executive Director]

Of course, we're a limited assortment model, so we're not looking to be constantly increasing our range. Our business strategy is all around just picking the leading brand in any particular product and making sure we have it at a highly competitive price. So not seeing any major impacts from that. I think for us the greater relevance is possibly the closure of Tesco direct, which was their general merchandise proposition online. The fact that, that's closing, I think, does give us some market share opportunity because whether it's toasters or curtain poles or indeed, housewares generally, that, obviously, is a major part of what we do in our stores.

[Operator]

And next question is from the line of Shelly Yi Xie from RBC.

[Yi Xie, Analyst]

Just 2 quick questions for me, please. On Jawoll, you talked about the clearance of orders and stock and it's going as planned, but could you provide a bit more detail on that? And then when do you think we can expect a clear and clean stock position for Jawoll? And then the second question is around the impact of the higher oil prices. Are you seeing anything from consumers here in the U.K.? Do you see them maybe switching back to the growth of that, do you sell fuel?

[Sundeep Arora, CEO & Executive Director]

Shelly, so in your you first question, it's a pretty straightforward answer actually. The team in Jawoll have accepted the challenge of completing the shift in the product assortment by September of this year because for us the all-important Golden quarter, October through December is when we want to have the B&M products on their shelves, and so we think that process will be of exiting previous product ranges will be complete by September, and they're absolutely on track to achieve that. In terms of your second question around oil price, we actually think that the relevance of that is that the U.K. consumer will seek out value more than ever and that absolutely plays to the heart of our business model because our customers are those that not only enjoy a bargain, but also those that need a bargain, and as the cost of filling up your car with a tank of diesel or petrol increases, it makes it all the more compelling that you save money on what you're buying for your home, buying them through B&M. When we think about all that periods of high oil prices, we didn't suffer to supermarkets. A lot of our stores out of town are very close to the major supermarket, quite often we're on the same retail park, were effectively on their way on the main roads, the ring roads or the arterial roads, so in previous periods of high oil prices, we've not seen any negative impacts at all.

[Operator]

[Operator Instructions]

[Sundeep Arora, CEO & Executive Director]

I think we've probably exhausted the questions, moderator. And I think we've had a good discussion, so I say we wrap up there and can I thank everyone for their time and interest in B&M.

[Operator]

Thank you. And this now concludes the conference call. Thank you all for attending. You may now disconnect your line.