B&M European Value Retail SA

LSE:BME

Earnings Call Transcript 2020-Q3

[Operator]

Hello, and welcome to the B&M Q3 Trading Update Call. [Operator Instructions] And just to remind you, this conference call is being recorded.Today, I'm pleased to present Simon Arora, CEO. Please go ahead with your meeting.

[Sundeep Arora, CEO & Executive Director]

Good morning, everyone, and happy new year to you all. As just mentioned, we'll adopt our usual approach today. I have with me Paul McDonald, our CFO; and Steve Webb, our IR Director.I'd like to preface the call with some brief opening remarks, and then we'll be happy to take your questions. Paul and Steve, of course, will be available after the call if you'd like to have some items followed up on individually.So first of all, I'd like to put this morning's statement into context. Overall, total group -- growth across the group were solid and broadly in line with expectations. Our total group revenues grew year-on-year by 9% in the quarter. In the U.K., the core B&M fascia stores saw similar total revenue growth of nearly 9%, which was particularly helped by a strong contribution from this year's excellent crop of new stores. Our like-for-like growth, however, in that fascia was disappointing in the core business.We planned for stronger growth, but in the rather odd trading conditions that prevailed in the run-up to Christmas, those sales didn't come through quite as expected. Consumers' shopping patterns didn't develop as they normally do in those last few weeks before the big day. We started the quarter solidly. But as we approached late November and December, those like-for-likes weakened. It was obviously interesting to us to read yesterday that the British Retail Consortium stroked KPMG figures for the combined November, December period came out at minus 0.9% for the total market. In which context, our total plus 9% growth is actually rather pleasing.Now for whatever reason, whether it's the timing of the election, the wet weather or that customers didn't, for some reason, feel particularly festive this year, the unusual trading patterns meant that some important areas like toys, Christmas confectionary and beauty gifting were down like-for-like in the period, which then meant we were overall flat like-for-like despite very pleasing performances across many other categories. We hear from our industry suppliers that these issues will not be an unspecific. The toy market, in particular, was described as being minus 10% down year-on-year. And we think that's because, in the end, there wasn't a major new craze or movie franchise that really lifted sales.I should mention that the toy department peaks at 12% of our mix in December, so that was a material drag on our like-for-like given the overall declines in the toy market. However, other product carriers, such as homewares and core food grocery, continued to perform well and allowed us to deliver the small positive like-for-like of plus 0.3%.So whilst this like-for-like figure was lower than our expectations, from an operational perspective, the team executed peak season really well. Our operating costs were well controlled, both at store level and in distribution. Importantly, we did not resort to any unusual discounting or promotional activity when others did so. Importantly, we exited the period pretty clean on stock, which bodes well for the gross margin for the full year.So from a profitability perspective, it was a solid quarter. And this, of course, speaks to the strength and resilience of our business model. The point being that you can withstand disappointment in 1 category, such as toys, yet still deliver pleasing profitability growth through our store opening program and the performance of the many other categories in which we trade.As a final point of detail, I should mention that we did cut back further year-on-year on Black Friday activity. So some of the underperformance on sales were actually sales which you don't actually make much profit on anyway because they're discounted sales in that Black Friday weekend.So looking forward, an early fourth quarter trading does not give us any particular concern, but of course, we are only 10 days into the quarter. We're achieving a small positive like-for-like even though, as we look at the quarter as a whole, we are up against a very strong positive comp of plus 5%. So really, as we think about this next 10 weeks of the full financial year, what really matters is snowfall. It's adverse winter weather that could be disruptive before our year-end. But absent that, we are confident that the business will deliver the good full year performance that you're expecting.Turning elsewhere to the group. Our convenience store business, Heron Foods, performed well even though it was up against a strong year the prior year. Our French business, Babou, continues to perform in line with expectations, and we are extending the B&M fascia there to 10 further stores from today and the end of the financial year-end. What that means is that by that year-end, there will be at least 14 stores trading as B&M in France. We're really looking forward to the next financial year in Babou because, of course, that's the first full year where the product range is entirely sourced under our ownership rather than dealing with inherited ranges or inherited range plans for spring/summer 2019 as we did last year. In Germany, we're in the early stages of our strategic review, and we will, of course, update you when we have something to announce.Finally, in respect to the sale and leaseback of our new Bedford distribution center, the sale process is moving forward as planned. We expect to be able to announce a transaction in the near future. In the meantime, we are in the process of beginning the full commissioning of the facility, which is now completed in terms of fit-out. At the time of any announcement on the sale and leaseback, we will, of course, provide a further update on our plans for the return of surplus capital.That completes my opening comments. Paul and I would now be very happy to take your questions. Thank you.

[Operator]

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

[Jonathan Pritchard, Retail Analyst]

Sort of 2 or 3 for me. Firstly, on the toy point, are you just a little concerned that this is something more structural? I know we didn't feel very festive about it this December. But could you be a little bit more of a -- the youth today, they get -- given iPads and apps on their phone and they don't want to sort of sit and play Monopoly like they used to. So is this -- will your approach perhaps change a little bit in sort of 10 months' time?And on the margin, you obviously went 2 for GBP 16 as opposed to 2 for GBP 20. Can you just talk me through a few of the sort of moving parts that's actually where that ends up being a sort of solid margin performance?And then in France, just a bit of color on the badge flips, if you could call them those, or the re-badging over to B&M, how different do the stores look and then what's the local reaction been?

[Sundeep Arora, CEO & Executive Director]

So thanks for your questions. So first of all, in terms of the toy market, we absolutely accept the point that, certainly, for the older toy -- older children, gaming is more interesting around electronic devices and online rather than traditional toys. But the vast majority of the toys we sell aren't actually end of that market. They're much more at the under 10-year-olds. But the beauty of the B&M model, of course, is that we can move with the times. We have the lever of space allocation. And absolutely, if we find over the next 3 years that perhaps there is a structural problem in the toy market, we have, of course, at our disposal the ability to redeploy space from toys to housewares, home adornment, et cetera, DIY, very easily and very cheaply. There's no CapEx involved. It's very simply an allocation of shelving space from year-to-year.And on your second question around back to the toy market on our promotion of 2 for GBP 20 or 2 for GBP 16, that's actually planned. We do that every year, so that's nothing unusual. And I think the big picture to reassure you of is that we feel we're in a good place on gross margin. And again, I referenced the fact that we didn't do any unusual discounting or any unusual promotional activity this last Christmas. And indeed, we probably did less than the previous year in terms of Black Friday.And on the re-badging of Babou stores, I should clarify that, that process starts at the end of the January sales. So when I say we are re-badging 10 stores from Babou to B&M and relaunching them, that physical process starts towards the end of January and will be completed by the financial year-end. So we can't give you numbers yet. But what I can say is that in addition to the changed name above the door, the flow and layout of the store much more replicate the B&M model than the existing Babou model of a series of universes and the racetrack rather than our more conventional supermarket aisle format.

[Jonathan Pritchard, Retail Analyst]

You're going to have already -- you have got a handful already, haven't you, that are world-class B&Ms?

[Sundeep Arora, CEO & Executive Director]

We have. And they opened as B&M from the start, so they're not reconversion. So you don't have the benefits of before and after. But broadly speaking, we're pleased with those new stores that opened as B&M. And of course, actions speak louder than words. And 10 more are going to be trading as B&M in the next 3 months.

[Operator]

The next question comes from the line of Adam Cochrane from Citi.

[Adam Gareth Cochrane, Director]

The first question, on the U.K., was the sort of the weakness that you've seen related more to average basket than footfall given it was very category-related rather than seemingly overall? So is there people coming in anyway but just not picking up a toy or a stocking filler or whatever it may be?And then secondly, on the gross margin, you talked about lower promotions. Would the gross margin -- were you expecting it to be up given your sort of planned lower promotions around Black Friday, that you have to give some of it back to clear the excess inventory that didn't sell as well as you thought to sort of leave you in a flat place overall?

[Paul Andrew McDonald, CFO & Executive Director]

Yes. Okay. Adam, yes, just in terms of the average basket value question, et cetera, if you looked at our out-of-town stores, actually, in terms of footfall, which is countered around about 80% of the sales in the quarter, I mean footfall in those locations is actually up 0.5%. So the customers are certainly going into those locations. And in terms of overall sense, we saw an overall increase in the ATV of around -- slightly up around about 0.5% and a very marginal overall decrease in sort of total kind of footfall. But equally, the actual out-of-town locations were actually very strong.

[Sundeep Arora, CEO & Executive Director]

On your second question, Adam, around gross margin, I think what we're saying is that we had an expectation around gross margin for the quarter. We've achieved that gross margin expectation, and the only mild disappointment is around the like-for-like sales number. But that, in some parts, is offset by cutting back store cost and logistics cost accordingly. One of the things we're very good at, at B&M is reacting to trading conditions on a, if not daily, certainly weekly basis. And we're able to adjust our store wage overhead on a weekly basis in line with weekly trading conditions. So as a consequence, the fact that it was 0.3% like-for-like rather than [plus 2%] and it doesn't make a huge difference to our profitability for the quarter.

[Adam Gareth Cochrane, Director]

So if you're happy with the end-of-quarter inventory level and the sales were a little bit weaker than you were planning, I'm assuming that you have to discount some of that product to get to your end-of-period good stock level.

[Sundeep Arora, CEO & Executive Director]

So it's down to the nature of the stock. So those pockets of stock where sales were disappointing are perfectly good products that we'll sell through the next few months. So that's why we say we're happy with inventory levels. And as a total, inventory is in line with previous years.

[Operator]

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

[Richard B. Chamberlain, Managing Director of Consumer Retail]

A couple from me, please. Was there any pressures on the like-for-like sales or the inventory, I guess, of existing stores from the new store openings? Because you obviously had a very healthy pipeline of new store openings. And I wondered if that had impacted the existing stores at all or more than planned during the quarter. That's the first one.The second one, could you just remind us also of the food weighting or importance of food in Q3 versus the other quarters? My impression is that sales trends were pretty volatile in that sort of run into Christmas. But yes, I just wonder if you can talk about the sort of relative weighting in the peak quarter.

[Sundeep Arora, CEO & Executive Director]

Richard, so we actually don't believe that our new store opening program is materially different to previous quarters. We actually don't give a lot of attention because it's not a materially large number. So what we're saying really is that the slightly soggy like-for-likes, number one point is the toy market. If you peak at 13%, and many weeks, you're at 10% on toys, that market as a whole shrinking 10% is a material headwind. I think, secondly, we're saying that for the high street in particular, footfall was down on some days. I mean stating the obvious, on election day, it was down 5%. Election week, it was down 5%, and that adds to the mix.So I think what -- the big picture, what we're saying on like-for-like, is that we're not seeing anything strategically that worries us. We take a lot of comfort, for example, that for our out-of-town destination stores, our shopper numbers, our footfall numbers were up. So actually, that's a positive. And in those out-of-town stores, the drag that I described previously, there was one less Barbie doll in the basket or one less chocolate selection box in the basket. So this is all just noise, I think.Turning to your second point on food. We don't break out our like-for-likes by individual department for commercially sensitive reasons. But what I can assure you, having heard all the trading updates from the grocers, we did a better job than anybody else. Our core food department outperformed any of the numbers you've seen so far. And in December, it's about 15% of the mix.

[Operator]

And the next question comes from the line of Simon Irwin from Crédit Suisse.

[Simon William George Irwin, Director]

Two quick ones for you. The first one is, judging from your comments, Simon, that the decision about capital return is not dependent on your decision about what you do with Germany, if you can just confirm that.And the second is if you can just give us a bit more flavor around inflation in ambient food and HPC in the U.K., I mean how much lower was it year-on-year? And what's the outlook for the year ahead?

[Sundeep Arora, CEO & Executive Director]

Simon, so you're right. Whilst I have to preface my response by saying this is absolutely a Board decision and any comments should be taken in that context and have been reviewed by the Board at the time. When we internally think about capital return, there are 2 separate issues. One is the immediate surplus capital generated by the sale and leaseback of the Bedford facility. And then separately from that, perhaps later in the year, there's a debate around running an efficient balance sheet. So you're quite right, they're 2 separate issues, certainly in my mind. And...

[Simon William George Irwin, Director]

So -- sorry, just to follow up on that. Any exit from Germany, then you're confident will be kind of capital-light or even kind of involve capital inflows?

[Sundeep Arora, CEO & Executive Director]

Yes, absolutely. The exit from Germany will release capital. It won't require capital. That's how we think about it. I'll pass over to Paul for the question on inflation.

[Paul Andrew McDonald, CFO & Executive Director]

Yes. In terms of inflation on food, Simon, yes, I mean broadly kind of flat. I mean I think it's -- yes, again, back to Simon's point, given the fact that actually, we've outperformed in terms of the grocers on the food market just shows -- actually, on that kind of core food offer, we definitely have some kind of LFL volume growth in relation to that. And probably just as an aside, really, just to kind of reassure around some of those other areas that kind of [ grocered ] areas like cleaning and [ pet ], et cetera, or actually on health and beauty -- the core health and beauty after all performed very well in the quarter as well actually. So I'd say, fairly comfortable with how those other ranges have performed in the quarter.

[Operator]

And the next question comes from the line of Greg Lawless from Shore Capital.

[Greg Lawless, Research Associate]

Just a question, really. With the benefit of hindsight, what would you have done differently this Christmas, if anything?

[Sundeep Arora, CEO & Executive Director]

Greg, that's a great question. Thank you for it. Gosh, so intuitively, probably would have given toys a bit -- little bit less space, would have given seasonal confectionery a little bit less space and would have given that space to home adornments, housewares, et cetera. They had a really, really strong Christmas. We look across to the category specialist of that area, the norm we see some nice numbers, but actually repeat them so -- in that category. So some space allocation tweaks, but isn't hindsight a wonderful thing?

[Greg Lawless, Research Associate]

No, it is. And just following on that, really. Is the -- do you feel the competitor intensity is getting greater? And where I'm going with this is, thinking about Home Bargains, you seem to have had another stellar performance this Christmas and whether that has read across into your business and others.

[Sundeep Arora, CEO & Executive Director]

So we see the presence and the success of Home Bargains as a constant in our business. They were larger than us when we started growing this business. Whilst we're now today larger than them, the reality is that they keep us honest on margins, and I'm sure they would say the same about us. They tend to perform better on some subcategories, and we've outperformed on others. So no, to answer your question, we don't see that being a direct impact. But of course, the U.K. is a competitive market, but we think ours is a very compelling model.

[Operator]

And the next question comes from the line of Tushar Jain from Goldman Sachs.

[Tushar Jain, Research Analyst]

Just a couple of questions from my side. Just want to get your thoughts on how you think about Black Friday and probably for the next year as well. Will your focus will always be improving cash gross margin and probably see like-for-like trending negative there?Second question, on Babou, am I right to think that you had some of your own sourced products on -- in the stores? So I'm just wondering, if yes, then how did they perform during Christmas?And finally, if you can give us a sense of how many store relocations will be done in the U.K. and how does that impact next year store -- net new store openings?

[Sundeep Arora, CEO & Executive Director]

Thanks. So in terms of Black Friday, what I'd share with you is that, certainly, for B&M and I think for a number of other high street retailers now, it's a nonevent. Black Friday in the year just gone, the quarter just gone was actually not that different to the same Friday the previous year, which wasn't, in fact, Black Friday. So it's a nonevent, and I'd like to think we've hit the bottom on that. And as I look across to some of our competitors, there are a number of them that also didn't really do much. So I actually think that's a good thing. Having sales just for the sake of sales to flat your like-for-like number isn't actually smart retailing. And so if we eventually see the end of Black Friday for bricks-and-mortar retailers, that wouldn't probably trouble me so much.On your second question around Babou, yes, we're pleased with how B&M products has been selling in Babou. Clearly, for the buying teams, this is their first season selecting product from our product ranges to deploy them on the shelves of the French stores. And of course, the first time you do something, there's always room for improvement. And that's why we look forward to next year with such excitement because you get the opportunity to learn from any small mistakes and you learn to -- you get opportunity to build on successes and do more of stuff that sold well. So that's all going pretty well.Your third question, I'll pass it to...

[Paul Andrew McDonald, CFO & Executive Director]

Yes. In terms of relocations, I think we'll have done that for 6 in the year, maybe 7, it's depending on the timing of store. Equally, I think it's just worth reiterating that in terms of these relocations, the premise is actually normally removing a low-contribution store and just replacing it with kind of larger B&M store. And you've actually probably seen from our EBITDA chart, I mean these are just accretive to -- in terms of business performance.

[Sundeep Arora, CEO & Executive Director]

I think the last thing I'd comment on the store opening program is that if you look at the detailed statement, we state that we will -- we believe we'll finish the year in our core B&M fascia having opened 51 gross new stores. And I think we normally talk about somewhere between 40 and 50 gross openings a year. So we're pleased that we will end the year having achieved the upper end of the range in terms of new store openings. But the bit that I should explain is that that's only 41 net because we've closed 10 stores. But I'm entirely confident that when you see the full year numbers and you see our EBITDA bridge, you'll see that store closures really don't move the needle much on EBITDA.

[Operator]

And the next question comes from the line of Warwick Okines from Exane.

[Alexander Richard Edward Okines, Research Analyst]

A couple of questions from me. The first is, Simon, you shared some thoughts about Q4 like-for-likes, already mentioned the tough comp. But obviously, that tough comp is kind of because of the Beast from the East in the prior year. Is kind of the way to think about it that if you were given normal weather, that actually you're on a level-playing field? Or is there anything else to flag around calendar effects, et cetera?Second one, just I appreciate this is a sales update, but I was wondering if you could talk about your hedging rates for the year ahead. I think the last time you've spoken, you're sort of hedged out to June. I was wondering if you've got any more cover and at what level?And the third one, again, looking ahead to the next financial year, if I may. National living wage and the sort of associated cost pressures in your business, how you're thinking about cost inflation in the year ahead?

[Sundeep Arora, CEO & Executive Director]

Warwick, yes, thanks for your questions. So on the like-for-like for Q4, I suppose the way I'd answer your question is by saying, last year, there was practically no disruption from snow, very, very little. And the reality is a multiyear average situation that you would get the odd weekend or the odd few days where U.K. retailing gets [ north ] of a 6%. So that's why we're sort of expressing a little bit of caution around weather. We're up against plus 5% growth against a winter season last year that really had no disruption, very, very little indeed. And so that's why we're just saying be a little bit conservative in your modeling, albeit as we've said so many times, whether it's plus 1%, plus 2%, plus 3%, because of the way we control our costs, doesn't really dramatically move the EBITDA needle. And of course, this final quarter is the least important in terms of EBITDA and earnings.Paul, do you want to say something on hedging last year?

[Paul Andrew McDonald, CFO & Executive Director]

Yes. Just in terms of hedging, our policy, Warwick, is to kind of hedge between 6 to 12 months out. In terms of rates, I mean I think it's probably fair to say currency rates have relatively stabilized. It's -- the market is kind of moving in a relatively tight range over the last kind of few months, actually. So you can probably draw your own conclusions on where kind of where rates are.

[Sundeep Arora, CEO & Executive Director]

Yes. We're happy with the current level of hedge and how far out it goes, so I'd just reassure you on that point.In terms of your final question on cost inflation and the living wage, clearly, it's an industry-wide issue. And we do have some tools at our disposal around productivity gains to offset that headwind. We are, over the next few months, deploying our new workforce management tool, which helps around scheduling and brings on to colleagues' mobile devices and a lot of their HR tasks around holiday request, shift changes and rescheduling of people to the right times of day and right days of the week. So we have some things we can do. But as an industry-wide issue, I suspect that some of the other players in the market will have to inevitably expand gross margins in order to pay for some of those costs.

[Operator]

[Operator Instructions] Our next question comes from the line of Ben Hunt from Investec.

[Benedict Anthony John Hernaman Hunt, Research Analyst]

Most of my questions have been answered. But I suppose a more general question is that for some time, you've been focusing more on cash gross margin, and you mentioned we'll see that you didn't do any early discounting. Is there a risk that your value credentials, we will -- certainly, is it risk compared to your competitors?

[Sundeep Arora, CEO & Executive Director]

That's a good question. So we're an EDLP retailer. And if you get the product right to start with and if you bought it right, at our gross margin, our EDLP price is the best price in the market. And I can assure you, on a daily basis, buyers are checking across the market to making sure we're never embarrassed. And if, for whatever reason, on those rare occasions our first EDLP price isn't competitive, we'll change the price immediately. At least twice a week, stores get price changes to reflect any market movement. And so we feel that our value credentials are as strong today as they have been. So that's how we think about that.

[Benedict Anthony John Hernaman Hunt, Research Analyst]

Okay, great. And then on the new stores, I mean, clearly, they're performing well. Can you sort of talk a bit more where you were opening in this quarter and where you see opportunity going forward, whether you can be doing more of your own sort of -- opening in your own formats or whether you're seeing opportunities coming up from the likes of Homebase and maybe where you're now thinking your store target could go?

[Sundeep Arora, CEO & Executive Director]

Sure. I'll just try and answer that question. Just the other thing to say about managing the business for cash gross margin is to just talk about beers, wines and spirits. So for example, one very easy lever for a management team of a retailer like ourselves to drive like-for-like sales is just to put lots of really good deals on for beers, wines and spirits. You make very little margin, but my gosh, does it help your like-for-like number. We just don't do that. We don't run the business in that way. We don't think that's the right way to run a business. We're very focused on EBITDA growth, and our long-term track record over 15 years, I think, validates that.And turning to your question on new stores, you're going to smile, Ben, because I don't know, in terms of the last 3 months, where the stores have opened. Because what you might find surprising is that we are genuinely agnostic as to whether a new store is in the South, the North, Northern Ireland, Scotland, Wales, Essex or Aberdeen. The reality is the crop of stores this year are really good. Whether it's our large home store format, whether it's a smaller out-of-town on a parade store or whether it's a town center store, Paul and I were looking at the crop of this year and looking at how, on average, they performed. And in each case, each of those 3 cases, this year's crop is outperforming the level that we budgeted those stores at. So we're just really pleased with the new store program, and that's testament to the great work that the team is doing both in finding those stores and then getting them opened.

[Benedict Anthony John Hernaman Hunt, Research Analyst]

Okay. And are these on your store target?

[Sundeep Arora, CEO & Executive Director]

There's no news on that. We are -- we're still below 600 stores. We think that the U.K. can comfortably take 950. At our store opening rate of 50 stores a year, really, that's a question for 2, 3 years out rather than a question for today.

[Benedict Anthony John Hernaman Hunt, Research Analyst]

Okay. Then finally, on -- I think on Adam's question, you mentioned there were pockets of stock that you think can be sold. I might assume from that from the ascending categories that you're going to over win for those -- I mean certainly walking around your knees, staffing all of them, still there's quite a lot of toys still after Christmas hanging around on the shelves. Or do you think you've actually -- there is a time there to add or you can hold them until...

[Sundeep Arora, CEO & Executive Director]

So the phrase I've used to, and it's one that is used colloquially inside the business, is the stock today is as clean as it's ever been. And what we mean by that is just it's new stock, it's clean, it's very sellable. We aren't worried about it. So some of that over -- on a line-by-line basis, some of that overstock in toys, it will sell. It's just the rates of sell weren't quite good enough, so it will sell over the next few months. And to answer your question directly, the level of carryover to next year is no more than previous years, so nothing new to report.Very good. We've taken our 0.5 hour, moderator, so I think we'll wrap up there. Can I thank you all for your questions and reiterate that if there are any outstanding questions, please do get in touch with either Steve or Paul. We're very happy to answer them. Thank you.

[Paul Andrew McDonald, CFO & Executive Director]

Okay. Cheers.

[Operator]

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