B&M Announces Departure Of CEO After Cutting Profit Guidance

Discount retailer B&M issued another profit warning today due to tough trading conditions, while announcing that its Chief Executive Alex Russo would step down after two and a half years in the role.

Just weeks after it narrowed its profit view following a disappointing Christmas period, B&M said today that its adjusted EBITDA was now expected to be in the range of £605m to £625m – down from the previous estimate of £620m to £650m.

The company stated that the lower forecast “reflects the current trading performance of the business, an uncertain economic outlook and the potential impact of exchange rate volatility on the valuation of our stock and creditor balances, which is a non-cash item.”

In recent months, most of the UK’s major retailers have warned of a tough year ahead due to the continued cost of living crisis and the government’s decision to raise employer national insurance contributions, which is expected to lead to job cuts and higher prices.

Amid the rapid expansion of its store estate, B&M has looked to increase the number of items it sells and leaned on its competitive pricing to counter consumer caution. However, its like-for-like sales slid 2.8% over the key Christmas period, which was the chain’s third successive quarter of decline as cautious consumers reined in their spending.

Russo, who has held the top job since September 2022 and was earlier its finance chief, will retire at the end of April. B&M said it was in the advanced stages of a recruitment process to appoint a new CEO and will provide an update in due course.

Analysts at Jefferies said the management change was of “limited surprise” and noted that the profit warning indicated that an improved December/January like-for-like trend that B&M highlighted last month had not been sustained.

Tiffany Hall, Chair of B&M’s Board, commented: “Alex has increased our store footprint in both UK and France and driven a relentless focus on high operational standards and low costs, enabling the company to provide great products and everyday low prices to our customers whilst generating continued strong cash returns for our shareholders. We wish him well for the future.”

Russo added: “The business has been successfully steered through the pandemic years and is now larger and stronger, with group revenues increasing by almost 50% and cash distributions to shareholders in excess of £2.0bn during my tenure. It has been professionally rewarding to assemble and work with a high-quality leadership team and to retire leaving growing businesses with great potential in both UK and France. I wish the Board and the leadership team every success in the years ahead.”

NamNews Implications:

• To non-City eyes, a 2.5% drop in anticipated EBITDA seems trivial.
• But always good to manage expectations…
• Meanwhile, B&M is still worth a supplier-bet…
• …given its business model is better than most, for uncertain times.

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The Offline Limit to Online Growth hits Debenham's share price

Yesterday's news of Goldman Sachs warning that Debenhams online shoppers are cannibalising in-store sales was the first overt sign that the market is acknowledging the profit-diluting effect of online growth in B&M business. The resulting 7% plunge in share price indicates the impact of online profit dilution for investors in B&M retail.

Essentially, given that it is one of the only real growth areas in retail, major retailers cannot afford not to optimise the full online potential of their brand. However, compared with the relative simplicity of serving a customer instore, meeting a consumer’s online needs means additional fulfilment costs including picking, packing, shipping and handling returns.

Online grocery is even more complex in that a typical online shopping basket contains more low value and bulky items, reducing the number of orders per van and thus dilutes van productivity. In addition, consumers are generally unwilling to pay for delivery.

As a result, given that a home delivery costs £20, and that the consumer is unwilling to pay more than £5 per order, the retailer loses £15 per drop, only partly recovered via the margin on the goods delivered. Incidentally, those retailers hoping to improve online profitability by shifting their emphasis onto more lucrative categories (i.e. bigger margin non-foods), then pick up the additional profit-dilutor of online returns, where shoppers send back goods at four times the rate of returns made to Bricks & Mortar stores…

Given that B&M retailing can be more profitable than online, it follows that, as a retailer grows their online business faster than their B&M sales, the overall profitability of their business will be diluted.

Click & Collect is not the full answer
Meanwhile, Click & Collect is not a compete solution, in that, having the shopper shoulder the burden of the last mile by collecting from the store, this still leaves the retailer to cover the cost of picking, packing, order admin, payment and returns. Compare this with the relative simplicity of a store visit by a regular shopper....

However, Click & Collect can have the added benefit of possible additional sales resulting from the ‘collect’ visit. This is probably one of the reasons that Tesco is converting some of its redundant superstore space into fulfilment/click & collect centres by using 42,000 sq. ft. of its Dudley Extra store in the West Midlands (The Grocer).

Action for NAMs?
Online profit dilution means that suppliers need to ensure that your part of the B&M retailer’s online portfolio is tightly matched to consumer need, in order to minimise the possibility of returns. This means pruning your online range to fit specific retailer online traffic, although given that space is not a cost online, the retailer’s online portfolio can contain many of your slow moving ‘long tail’ products and thus compensate for any instore 'culling' based on rate-of-sale hurdles.

Longer term, it is important to monitor the B&M retailers annual accounts in order to track overall profit dilution as their online business grows. Retailers will not normally divulge % of sales made online so you will have to rely on anecdotal feedback, but it could be worthwhile to use say 15% online vs. 85% mainstream until you pick up evidence to the contrary.

Ideally, well-run B&M retailers should make 5%+ Net Margin in the UK, but obviously the typical 2% to 3% currently being made are the result of 8 years of flat-line demand and increasingly the growth of their online business.

What is indisputable is the fact that online is a profit dilutor, the stock-market now coming around to that view, and you are ideally ahead of the curve…