B&M European Value Retail SA

LSE:BME

Earnings Call Transcript 2019-Q3

[Operator]

Hello, and welcome to the B&M Retail Q3 Results Announcement. [Operator Instructions] And just to remind you, this conference call is being recorded.Today, I am pleased to present Simon Arora, CEO; and Paul McDonald, CFO. Please begin your meeting.

[Sundeep Arora, CEO & Executive Director]

Good morning, everyone, and thank you for your time on this rather busy morning. Given the volume of updates today, we're proposing to keep the call to 30 minutes, which I know you'll thank me for. But before we turn to Q&A, I would like to say a few opening remarks about each of our 4 fascias within the group. I'll start with our core B&M fascia which, of course, represents 80% of our group revenues in the quarter. I would describe the performance of B&M over the quarter as solid in rather difficult and volatile market conditions. Firstly and importantly, we continued to grow our top line and we opened 20 new stores over the 13-week period. Some of those openings broke all-time records for a new store opening first week of trade at B&M. So we are delighted by the quality of the new stores that are being opened. Of course, the real benefit of those new stores, that at last quarter, is next year. Just the annualization process, the calendar effect for the 56 stores that we believe will open this year is expected to deliver an incremental GBP 125 million of additional revenue next financial year. To be clear, that's just the calendar effect of this year's pipeline and it excludes the new stores for next year, the pipeline for which is also very healthy.Let's now turn to the like-for-like performance. We were, of course, up against a rather demanding plus 4% like-for-like the previous year's quarter. October started unremarkably. We were positive like-for-like despite being up against very tough comps. But then, of course, as you've seen from the RNS, we had an extremely difficult November. In particular, the end of November in the fortnight up to Black Friday was very disappointing. The market conditions over that period have been well documented elsewhere, but suffice to say that my personal view is that Black Friday at the end of November is no longer really an important event for bricks-and-mortar retailers like ourselves. And that's not necessarily a bad thing. To a significant degree, that trading period is characterized by unhelpful, low-margin commercial activity.The good news, of course, is that December bounced back nicely. Having kept a tight control of stocks, we didn't need to resort to discounting or promotional activity. As a consequence, the month of December delivered a plus 3.2% like-for-like cash margin, which actually coincidentally equates to plus GBP 3.2 million of additional trading margin on a like-for-like basis versus the same December the previous year.All that said, we don't shy away from the fact that it was a tough quarter, and the net impact at a trading level was that we were minus GBP 2 million down versus the previous year. But of course, that's in the context of GBP 874 million of turnover that quarter. And don't forget, it's less than what we spent on TV advertising alone the same quarter the last year. And of course, this year, we didn't bother with TV advertising.Turning now to market share. We're obviously growing our market share in our core B&M business if only because we continue to have our high-quality, high-returning new store opening program. However, what I can share with you is that on a like-for-like basis, our grocery and FMCG categories also outperformed the market. And in fact, we note that, that category has outperformed each one of the major supermarket like-for-like figures that have reported to date. It's in general merchandise where we had challenging sales, especially in that November period that I mentioned earlier.Importantly, when we think about exit rates from the quarter, in December, we were positive like-for-like both on sales and footfall. In fact, we enjoyed our busiest ever week in December 2018, and we served 6 million U.K. shoppers. I think that validates our view that the U.K. shoppers clearly like the value proposition that we have in our stores.Looking forward, January, the first couple of weeks of course only, have continued in that positive vein but it is, of course, very early to call. We do have some upside on gross margin because, put simply, we don't have as much discontinued seasonal stock leftover from the same time last year. But frankly, over the next 8 to 10 weeks, much will depend on the weather. Let me now say a few words on the other 3 fascias within the group. I'm delighted to report that Heron is trading stably and performing well. We're delighted with the acquisition and the business' ability to generate market-beating like-for-likes on a consistent basis.Jawoll, our German business, is showing encouraging early signs in those product areas that have benefited from the B&M supply chain. However, as we explained at the half year, we still have further work to do this coming quarter to continue to exit slow-selling, discontinued product from the previous management team. It's going to be next financial year that the stores will really have much more the look and feel of a B&M and utilize the B&M model more effectively.Finally, on Babou, our French business, we've just passed the 100-day mark since its acquisition. Only this week, my team and I were reviewing where we were up to against our pre-acquisition 100-day plan, and I'm pleased to confirm that everything is going in accordance with that plan. The team in Babou are well up for the task we set them to introduce the B&M model to that business and to the real estate that it occupies.So in summary, a difficult quarter and a mixed quarter, but a solid performance. But we certainly look forward to the remainder of the year and next year with confidence. So that's probably all I need to say in terms of opening remarks. Let's turn now to questions and answers. Thank you.

[Operator]

[Operator Instructions] And first question is from the line of Andrew Porteous from HSBC.

[Andrew Ian Porteous, Analyst, European Retail]

A couple of questions from me. I mean, this is obviously the second quarter where we've had a negative like-for-like performance, although accepting there's some choppiness around the quarter. But it's also the same quarter where you've sort of commented that inventories are sort of as planned and actually, in pretty good shape. Just wondering, to what extent like-for-like declines were actually planned or expected within your strategy? And if so, is there any sort of sense of missed opportunity there, that could you have done a bit better? And then the second question is, could you just give us a quick update on how frozen rollout is going and whether the stores are continuing to see good momentum as you introduce that?

[Sundeep Arora, CEO & Executive Director]

Andrew, thanks for those questions. Certainly, in terms of second quarter -- sorry, this last third quarter inventories, it is fair to say that there was a deliberate decision not to engage in too much promotional activity where you're just chasing volume for volume's sake. And that was particularly the case around the Black Friday trading period. I think there's also an important comment to make, though, around the interaction between turnover and profit. Let me give you a really interesting example, which is our Christmas decoration range. You'll be interested to hear that our Christmas decoration range had a minus 10% like-for-like on sales but a plus 11% like-for-like on cash profits. So in a nutshell, we had a pretty much full sell-through at full price on our Christmas decorations, achieving around a 50% gross margin, whereas the previous year, we'd effectively overbought on certain of the lines and we achieved an average 40% gross margin over that department over the season. So some of it was deliberate, but I think it was the right thing to do to be cautious going into the quarter given everything that was going on in the marketplace over the course of last year. On the question of the frozen rollout, that's unchanged. The golden quarter is not a good time to be changing the layouts of stores. So we have 80 B&Ms that sell frozen and chilled. And frankly, we're not proposing to change that number until Bedford, our new distribution center in the South, which is going to have frozen and chilled chambers, is operational. And that's not going to be until the end of this year or early next year.

[Andrew Ian Porteous, Analyst, European Retail]

Just one quick follow-up, if I could. Just on that point around Christmas decorations and the like-for-like being down 10%, what was the volume down in that case? I mean, is there any sense that you're just getting better terms off your suppliers that you're passing on to customers and so there's a sort of deflationary impact on your sales?

[Sundeep Arora, CEO & Executive Director]

No, no, I -- those numbers would -- they are sales, Andrew, but actually, prices were largely unchanged from year-on-year. So it's actually volumes. In other words, a buying team quite rightly doesn't seek to replicate the volumes of those sales that were at cost or unprofitable. And so we run the business on a daily basis actually looking at like-for-like cash margin. For us, that's a very meaningful and almost more important measure than like-for-like sales. And that's why I say that the December trading period was so pleasing because for December to deliver a plus 3.2% like-for-like cash margin up against a tough comp was actually a very pleasing performance and a very good way to end the quarter.

[Operator]

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

[Tushar Jain, Research Analyst]

Actually, 2 questions from my side. One is around -- just to get an understanding around Black Friday. When you look into the next year, would you be planning a little bit more promotional supported by the suppliers or it will be you're going to disengage from Black Friday promotions altogether? And second question, on B&M U.K., apart from home, is there any other category where you could improve your execution into the next year?

[Sundeep Arora, CEO & Executive Director]

Tushar, yes, good questions. So in terms of Black Friday for our business, actually, it's been gradually declining for 2, 3 -- for a couple of years now. I think this one, the year just gone, the quarter we're talking about, is probably the low point in terms of it effectively having now become a nonevent for bricks-and-mortar. We certainly didn't repeat some of the promotional activity from the previous year that is just chasing turnover and actually, in some ways, undermines our EDLP value proposition to our customers. And an example I'll give you is that the previous year, we had a blanket 20% off all toys; this year, we didn't do so. And what I'm hoping -- or what I'm expecting rather is that as we think about next year, we've effectively now reached the low of artificially inflated turnovers in November driven by the Black Friday thing, which has now sort of effectively petered out in terms of bricks-and-mortar. And coming to your second question around the categories...

[Tushar Jain, Research Analyst]

The categories, yes.

[Sundeep Arora, CEO & Executive Director]

Yes, we absolutely -- you're right to point out that homewares and home textiles is an area that we are doing a lot of work on in the background to relaunch in the spring. We recognize that we could have executed that category better within our business. But across the other categories, it's more about smaller incremental changes rather than big step changes. And the vast majority of our categories are in good shape. As I say, the disappointment of the quarter is more around just November and Black Friday in particular.

[Operator]

Next question is from Simon Irwin from Crédit Suisse.

[Simon William George Irwin, Director]

Just going back to the performance of -- at B&M outside of the food business, which obviously remains strong, some categories are notably weak. Can you just talk particularly around the more seasonal stuff, i.e., kind of toys and events? Has that become, do you think, structurally tougher?

[Sundeep Arora, CEO & Executive Director]

Actually, toys are positive like-for-like on a year-to-date basis. So we have benefited from the exit in the U.K. of Toys "R" Us, the previous category specialist. So we're clearly winning market share on toys. And some of you will have heard us talk about the fact we are so pleased to have got LEGO onto our shelves over the last 12 months, and I'm delighted to report that that's selling very well. And in fact, we're extending the range of LEGO products. So as you look at our toy range this autumn/winter, we had every brand that you'd want to have. And there wasn't -- as I talked to the toy buyers, there wasn't a single brand or license that was missing that they wanted. So we're in good shape on toys, actually.

[Simon William George Irwin, Director]

Okay. And -- but do you think -- I mean, obviously, you've talked a lot about Black Friday. You haven't mentioned Halloween, for example, in the past couple of quarters. I mean, I'm just wondering if your particular -- your historic strength in doing celebrations and events is getting incrementally tougher perhaps as kind of peers catch up with you.

[Sundeep Arora, CEO & Executive Director]

So I would describe it slightly differently, which is that we've been focused both in terms of Halloween and Christmas on cash margin rather than buying a lot of stock and then ending up having to sell a proportion of it at cost or below. So actually, the numbers for Halloween are not dissimilar to the numbers I've just shared with you on Christmas decorations where we had a negative like-for-like sales number, but we had a positive like-for-like cash margin. Paul, do you have those numbers to hand in terms of Halloween numbers? But you might have directionally some sense for them.

[Paul Andrew McDonald, CFO & Executive Director]

Yes, it was fairly bigger -- slightly larger that time. I think you were talking probably something in the region of sort of LFL sales down probably 15%, but profits actually closer to between around about 25% up actually, so Halloween was even stronger than the Christmas numbers actually, Simon.

[Sundeep Arora, CEO & Executive Director]

And Simon, I recognize that, that sounds very odd. But if you'd been to the stores in 2017, you'd have seen that in the few days before Halloween, we'd already gone on to sale because we had too much stocks. And similarly, in Christmas 2017, we'll have gone on to sale on Christmas lights and crackers and roll wrap 10 days before Christmas, whereas this year, we bought more cautiously, managed stocks more carefully, and we were able to remain at full price pretty much through to the end, Christmas Eve, and still have less stock to sell in the January sale than the same period the previous year. So actually, the seasonal buyers, Halloween and Christmas, should be congratulated on a very successful season, notwithstanding the headline like-for-like number was negative.

[Simon William George Irwin, Director]

Yes, good. Just on Babou, now that you're into the business. You kind of gave us kind of 12-month guidance around kind of clearance activity and profit and stuff at the interims but didn't really kind of specify how that kind of works with your full year. How much of this clearance do you think you can do before your March year-end? I assume not an enormous amount. So the kind of -- presumably, the bulk of it kind of features in the first half of next financial year.

[Sundeep Arora, CEO & Executive Director]

That's a great question. Actually, the regime -- this sort of regulatory regime in France is rather different to what we're used to in the U.K. There are some strict rules around when retailers can sort of start selling at a low cost. And actually, there's a window in January that we're currently in where you can do that, and then there's one in August where most of the pain is taken. So actually, some of it will be taken this January 2019. There'll be some gradual pain in next financial year with another inflection point in August. So I think the guidance we gave was that over a 12-month period starting from the acquisition, there was going to be some gross margin cost before the business looks and feels like B&M. And I think in a nutshell, what we've asked yourselves and your peers to do is not to model any meaningful EBITDA from that business in the first 12 months of ownership. But it's after that, that we expect the business to bounce strongly back and then be on course for growth.

[Simon William George Irwin, Director]

So this time next year, we'll be into the sunny uplands.

[Sundeep Arora, CEO & Executive Director]

Absolutely.

[Operator]

Next question is from the line of Warwick Okines from Exane BNP Paribas.

[Warwick Okines]

I have 3 quick questions, please. The first is just to come back on your focus on cash margin over the quarter. Could you just talk about where...

[Sundeep Arora, CEO & Executive Director]

Warwick, you'll need to speak up if you could, please. You're a little bit faint.

[Warwick Okines]

Yes, sorry, okay. Just coming back on your focus on cash margin this quarter. Just wondering where you are on the sort of journey of taking out unnecessary promos. Do you think there'll be more to do in the next few quarters and indeed, next Christmas? Or do you think you've sort of reset that level of promotional participation? Second question is just clarification. Is the gross margin commentary in the statement of B&M U.K. a specific comment or a group comment? Third question is, was there a calendar benefit in the quarter and into December from the fact that it includes a Christmas Eve, which it didn't last year?

[Sundeep Arora, CEO & Executive Director]

Good questions. Thank you, Warwick. So in terms of your question on promotional activity going forward, there are no plans to reduce it any further. I think I've hinted earlier in this call that we think where we got to in terms of November of the year just gone, in terms of very little activity around Black Friday, is certainly our sort of base position for next year and the year after. And we're not expecting the cash margin to expand in the core B&M business other than the comment around the fact that for January, we've just got less discontinued carryover from the Christmas period, so that should be supportive in the immediate term. In terms of the commentary around gross margin, that was the U.K. B&M fascia alone. The Heron business is pretty stable on cash margin. You shouldn't expect any fireworks there. But as we've explained in detail, both the Jawoll business and the Babou business are currently going through a process of clearing out historic discontinued lines in readiness for B&M product coming in. And that is working to the extent that the new departments that have hit the shelves at Jawoll, particularly toys and electricals, have performed very, very strongly indeed, really strong double-digit like-for-likes. And so the project is working as we would hope it to do. Paul, do you want to take that third question?

[Paul Andrew McDonald, CFO & Executive Director]

Yes, sure. I mean, it's probably a slight marginal benefit of kind of Christmas Eve, but it wouldn't surprise you to hear kind of, Warwick, that actually, Christmas Eve trading actually starts to diminish once you get past 2:00 or 3:00. Actually, most people have actually bought their Christmas presents by that stage actually. So it's not normally a massive day for us, actually, because as I say, people have normally done their Christmas trade prior to that. So it's a slight benefit, but nothing significant, and nothing material at all in the quarter.

[Sundeep Arora, CEO & Executive Director]

We don't have any Citi analysts rushing around on Christmas Eve trying to get the presents they forgot to get.

[Operator]

Next question is from the line of Niraj Amin from UBS.

[Andrew Hughes, Managing Director and Head of the Pan]

Actually, it's Andy Hughes here. Happy new year all. Just had a couple of questions. One was on the gross margins and if that comment was about 30 basis points was for the U.K. Can you split that down between mix effect from your grocery growing faster and the effect of lower promotions? And the follow-up was, given some of the examples you've given about lower volumes and higher achieved pricing, is there a rebate issue here or are you likely to suffer next year from lower volumes ordered with some of your suppliers?

[Sundeep Arora, CEO & Executive Director]

I'll take the second question first, Andy, if I may. So the general merchandise that we sell is almost entirely sourced from China from factories directly, and we just don't get into rebates and that sort of retro game with them. Everything's on a net price. And frankly, our store opening program in itself almost guarantees that our volumes are going up every year. So actually, we have a tailwind, not a headwind, around our purchasing power. So I don't see that as being a concern. Paul, do you want to say a little bit about the gross margin and moving parts behind the gross margin?

[Paul Andrew McDonald, CFO & Executive Director]

Yes, sure. I mean, certainly, you're right. I mean, clearly, the relative strength we've kind of got, you have grocery and FMC relative to general merchandise is -- kind of it would have been a headwind to us in the quarter, probably around about 70 or 80 basis points. Equally, clearly, the fact that we've grown by 30 basis points is just alluding to the fact that obviously, being kind of less promotional or not doing things like the 20% off toys in Black Friday and just that all-round tighter buying has meant that actually, the grocery margin -- the general merchandise margins have been very strong in the quarter despite -- and the overall margin is enhanced despite that tail -- that headwind from the actual -- the relative strength of grocery and FMCG.

[Andrew Hughes, Managing Director and Head of the Pan]

Okay, okay. So that -- yes, that nonfood performance is very strong. And in terms of just how that flows through into the first half next year, I know you were really just commenting on maybe it was sort of fizzling out in Q4, that benefit from lower promotions. But isn't it going to carry on into the first half, given it only really seems to be in the second half that you've really been sort of pulling back on promos particularly, as you mentioned there, the Halloween and some of the seasonal Christmas areas? Should we expect the first half...

[Sundeep Arora, CEO & Executive Director]

The driver of mix over the first half will be the gardening department. So that's the real variable, alongside whether we're able to deliver an improvement in our homewares and home textile department, which we've been pretty open about that has been underperforming for a number of months now. But other than those 2 dynamics, we don't see any particular headwind or tailwind in either direction. We see that the market has been relatively stable.

[Andrew Hughes, Managing Director and Head of the Pan]

All right. Okay. And just while I'm on, a question on Babou, whether the yellow jacket protesters have had any impact on your sort of 100-day business plan, whether it's sort of either stores being blockaded or depots having an impact on you?

[Sundeep Arora, CEO & Executive Director]

So it didn't affect the depots, but you're absolutely right, it did have an impact on some of our stores. I'm happy to share with you that about 20 to 30 stores were effectively closed for a couple of days on 2 or 3 occasions when you'd want them to be open, but I'm pleased to report that, that has now effectively faded away and is thankfully a thing of the past.

[Andrew Hughes, Managing Director and Head of the Pan]

Right, okay. Is it possible it will be an EBITDA loss in the part-year period that it's going to be in for FY '19?

[Sundeep Arora, CEO & Executive Director]

We don't...

[Andrew Hughes, Managing Director and Head of the Pan]

At the EBITDA level?

[Sundeep Arora, CEO & Executive Director]

We don't expect so, no.

[Operator]

Next question is from the line of Jonathan Pritchard from Peel Hunt.

[Jonathan Pritchard, Retail Analyst]

Clearly, November was very difficult for the industry as a whole, but [ for yourself ] particularly, are there things that perhaps you could have done differently? Or perhaps, put another way, did things like availability hold up okay? Were store standards there? Are you happy with that decision on advertising not to do it? Might that have made a bit of a difference? And then lastly, just an update on B&M Express?

[Sundeep Arora, CEO & Executive Director]

Sure. Good questions. So in terms of the quarter just gone, we are mindful and we recognize that there's one important category where we've not executed well, and that's our homewares and home textile department. We saw underperformance in that category midway through the year. And actually, we've made some changes both in terms of our senior management team for those categories and also some plan changes around how we merchandise the product and how we replenish the product around color and less assorted packs and more accuracy around backing the successful colors rather than just having assortment in the shipping carton. So that's something that we're working furiously on. Availability was otherwise rather good through the season. That wasn't an issue. And actually, it would be remiss of me not to congratulate the store teams on managing the challenges of November on a very dynamic basis. So I think what I'd share with you is that the teams on a weekly basis were able to adjust their costs in line with the revenues so that we didn't experience a lot of operational deleverage from that reduced turnover level. In other words, we made sure that the number of hours incurred at each store every week was appropriate to the amount of turnover going through the store as opposed to being inflexible. So they were very dynamic and flexible in managing that challenge. And then finally, on your question on B&M Express, there are only 9 so far. We didn't want to cause any disruption to any of the stores over the golden quarter by doing rebranding. There's another tranche of 20 Heron stores that are being rebranded as B&M Express, but that's happening this month as opposed to over the golden quarter for obvious reasons.

[Operator]

Next question is from the line of Tony Shiret from Whitman Howard.

[Tony Shiret, UK General Retail Analyst]

Really brief question. I just noticed from your statement there's no sort of affirmation of profit guidance for the current year. Market's looking -- or was looking at GBP 330 million at EBITDA level. Can you comment on that?

[Sundeep Arora, CEO & Executive Director]

Good question, Tony. Actually, if you look back over our corresponding statements for the Q3, we don't normally actually talk about guidance or such a range. We never have done. Paul, would you like to talk a little bit about where you see consensus and perhaps our thoughts on how that might change following this morning's news?

[Paul Andrew McDonald, CFO & Executive Director]

Yes, certainly. I mean, we calculated EBITDA for this current year to be about GBP 322 million for this current financial year. I think...

[Tony Shiret, UK General Retail Analyst]

That's the consensus?

[Paul Andrew McDonald, CFO & Executive Director]

Yes, consensus, yes, GBP 322 million. We probably expect that to nudge down very slightly, maybe by a couple of percent. And hopefully, I think we think that's probably a realistic place to be.

[Sundeep Arora, CEO & Executive Director]

Very good. Thank you. I believe we said 0.5 hour, and we've just now reached the 0.5-hour point. So thank you all for your time and interest, and I'm sure we'll speak to you again.

[Paul Andrew McDonald, CFO & Executive Director]

Thank you all.

[Operator]

This now concludes the conference call. Thank you all for attending. You may now disconnect your lines.