B&M European Value Retail was under the cosh on Monday after downgrades by both Goldman Sachs and RBC Capital Markets.
Goldman downgraded the shares to ‘sell’ from ‘neutral’ and cut the price target to 580p from 620p. It said that while it regards B&M as a best-in-class European discount format, the current disrupted supply chain and elevated input costs drive a flat earnings per share outlook for FY22-25.
“In the context of its current 18x price-to-earnings multiple, we expect the shares to underperform the sector over the next 12 month,” it said.
RBC Capital downgraded the stock to ‘underperform’ from ‘sector perform’ and reduced the price target to 575p from 600p.
It said B&M remains a well-managed retailer with a strong track record, but it sees more earnings momentum and valuation upside for some other stocks in the sector. The bank has cut its FY23-24 EPS forecasts slightly, due to a tougher outlook.
“B&M still faces very challenging comparables in its fiscal Q4 this year and the first part of FY23,” RBC said.
“Next year we expect its customers to focus more of their buying on essentials, and less on higher margin, more discretionary categories, which have performed so well during the pandemic. We estimate around half of B&M’s colleagues are paid the minimum wage, resulting in labour costs +5-6% year-on-year.
“Also, we think a recent fall in the GBP, along with higher input cost inflation, is likely to lead to higher discounting for B&M, in response to price rises. We think these pressures, along with a higher UK corporate tax rate in FY24 will result in much more pedestrian earnings growth over the next two years, following a near doubling of earnings over the last two years.”
At 1450 GMT, the shares were down 3.8% at 576.60p.
