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.
The post The B&M European Value Retail S.A. (LSE:BME) share price gains on rising Q2 revenues. Time to buy? appeared first on The Motley Fool UK.
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Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has recommended B&M European Value. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
