Shares in FTSE 100 retailer B&M European Value (LSE:BME) have been flying lately. Over the last 12 months, the company’s share price has risen by 75%.
The discount retailer is clearly built for tough economic times. But despite the recent gains, the stock trades at a price-to-earnings (P/E) ratio of 16, which doesn’t look expensive to me.
Discount retail
Over the last year or so, the macroeconomic headlines in the UK have been dominated by two main themes. The first is inflation and the second is the possibility of a recession.
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Both of these help generate demand for discount retailers. As prices go up and household budgets come under pressure, consumers look to try and get a bit more for their money.
The most obvious beneficiaries are Aldi and Lidl. But B&M has also been doing well – in its most recent trading statement, the company announced 13% total group revenue growth.
Furthermore, it looks like there might be further growth to come. Following the collapse of Wilko into administration, B&M has announced plans to buy 51 stores for a total of £13m.
Margins
Inflation can also be something of a challenge for retail businesses, though. Margins tend to be fairly low, meaning an increase in costs can really pressure profitability quite quickly.
As a discount retailer, it’s not surprising that B&M’s margins aren’t huge, so higher input costs are a genuine risk. But the company does have some power to offset this that its rivals don’t.
On average, B&M’s prices tend to be around 15% lower than its peers. This means it has scope to increase them without having to undermine its status as the best value for customers.
I think the company’s focus on branded products helps here. It also moves the business out of direct competition with Aldi and Lidl, which are tough rivals, but focus more on house brands.
A stock to buy
It feels strange thinking about a stock that’s up 75% over the last 12 months as a potential buying opportunity. But the B&M share price doesn’t look that high to me, even after last year.
As a high street retailer, the company operates in a sector that is undoubtedly under pressure at the moment. But this might be an opportunity as much as a challenge.
Acquiring units from faltering rivals might give B&M an inexpensive way to grow its store count. And so the company might emerge from a recession stronger than before.
I’ll be keeping a close eye on the company’s update next month as I figure out what to do about the stock. But I’m thinking seriously about buying it for my portfolio.
