B&M European Value Retail SA (OTCPK:BMRPF) Q2 2023 Earnings Conference Call November 10, 2022 4:30 AM ET
Company Participants
Alejandro Russo – CEO & Executive Director
Mike Schmidt – CFO & Executive Director
Peter Waterhouse – Group Financial Controller
Gareth Bilton – UK Retail Director
Tony Dobbs – MD, Heron Foods
Dave McCarthy – Head, IR
Conference Call Participants
Ben Hunt – Investec Bank
Adam Cochrane – Deutsche Bank
Nick Coulter – Citi
Simon Bowler – Numis Securities
David Roux – Bank of America Merrill Lynch
Warwick Okines – BNP Paribas Exane
Alejandro Russo
Good morning, everyone. Thank you for coming. A couple of quick introductions. Mike Schmidt, hands up. How many weeks ago, you joined us, Mike?
Mike Schmidt
3.5.
Alejandro Russo
3.5. So I’m delighted to have Mike up and running. Mike has been spending the last literally 3 weeks just touring the business, spending time with the different functions. So I think next time you hear the results, Mike will be fully in charge. So thank you for joining us, Mike. And the second introduction is Peter Waterhouse. Pete is our Group Financial Controller. Pete, you’ve been in the business almost 10 years now?
Peter Waterhouse
Yes.
Alejandro Russo
Peter has always been my right hand, #2 in finance, and I’m sure that Mike will rely on Pete’s counsel over the next few years. Peter is very experienced, technically very sound and he’s going to cover the financial presentation this time around, then we pass it over to Mike.
Excellent. So I will open with a very quick summary, then I will hand it over to Pete and then we’ll concentrate on some of the business themes, and I will invite a couple of my colleagues on stage later on. I will introduce them at the time.
So if we go to Slide #1, I will just recap some key numbers. You’ve already seen this on the RNS, but it’s important just to remind ourselves where we are on the half. So group revenues increased by 1.8% year-on-year. And that’s just over 29% on a 3-year basis.
We look at the B&M U.K. segment. I think the key number in here is a like-for-like in Q2 of plus 2%. And I will expand in a bit more detail actually what is driving that and what is happening in the early weeks of quarter 3. 10 gross new openings at B&M U.K. in the half. Very strong performance at Heron and B&M France. France grew at 18.2% sales in the half and Heron at 14.6%.
We’ve opened 7 new stores at Heron and 4 new stores in France in the first half. The new space is performing well. Adjusted EBITDA for the half at £232 million, which is a group EBITDA margin pre-IFRS 16 of 10%. Key driver compared to last financial year is gross margin in the U.K. That’s a moderation on a trading basis of 213 bps, and I will expand what is happening in the second half of the year.
Very disciplined stock control across all 3 businesses. And I think that comes together on the next point, which is cash from operations is up 83% year-on-year. We’ve delivered from an EBITDA of £232 million, £370 million in the half of operating cash. In simple terms, that tells you that what we set out to do when we presented back in May, we said stock was going to come down rapidly. That’s exactly what has come, and we’re exiting half 1 in a very good clean position heading into golden quarter.
So I’ll ask you to take the point that operating cash flow doesn’t deliver that level of performance if stock has not come down significantly year-on-year, okay? Net debt is at a very conservative level, 1.3x on an LTM basis, very comfortable in terms of our ceiling of 2.25. Liquidity is very high. There are new maturities anytime soon. So we have a very strong balance sheet heading into the next financial year. And we are going to be keeping the interim dividend at 5p exactly the same as last financial year, which will be basically paid mid-December as per normal process. That’s the normal interim dividend, okay?
Peter I’ll hand to you. You have 3 or 4 slides to take us through in finance and then I’ll concentrate on some of the business highlights. Thank you.
Peter Waterhouse
Thank you. Thank you. So we move to the first slide. This is our summary profit and loss. So the figures I want to call out here are our adjusted EBITDA at £232 million, which is a 10% margin. That’s down from last year’s figure of £282 million, which was a 12.4% margin but significantly ahead of our pre-pandemic position of £151 million, which was 8.5% margin. That’s a 50% increase overall over those 3 years.
This next slide demonstrates the building blocks behind our 1.8% revenue increase. It shows that the negative we suffered from the like-for-like result is more or less offset by our new store program. Strong performance then in Heron and France added another £59 million to our revenue figure.
This next slide shows the journey from the £282 million EBITDA down to £232 million. The main driver of that is the like-for-like estate, which is captured in the group margin dropping from 12.4% to 10%. Against that, there were several mitigating factors. I’ll call out a couple. There was £10 million from new stores, and there was £7 million from France.
This next slide shows our group interest expense. It has increased in the half that’s both planned and expected. The main driver of that is because of our new £250 million bonds, which were in November last year and therefore, not in the comparative. We’re in quite a strong position in terms of our key tranches of debt. The maturities are not until 2025 and 2028.
This slide demonstrates our strong cash generation. That’s been driven by our working capital management, which itself is a result of our planned material reduction in our stock position over the half. Alongside that, we’ve maintained our strong controls over our capital expenditure. Maintenance CapEx remains under 1% of revenue. There’s no significant CapEx projects required or planned. That’s led to our operating cash flow pre-IFRS 16 increase by £160 million year-on-year. That’s maintained our strong leverage ratio at 1.3x, well under our leverage ceiling of 2.25. And we are in a significantly liquid position going into the second half of the year.
Thank you. I pass back to Alex.
Alejandro Russo
Thank you, Pete. Very clear as always. Thank you. So total revenue for the group is clear. It’s 29% on a 3-year growth basis on the left-hand side. And it’s important to remember the evolution on a group basis, the EBITDA margin pre-pandemic started 8.5% for the half, move from exceptional circumstances to 12.4% last 1.5 financial years, and we have settled bang-on at 10% in half 1 this year.
Let’s remember that this is a 53% EBITDA growth for the group on a 3-year basis. So I’ll highlight a couple of points in terms of the P&L structure. We concentrate on B&M U.K. We look at the bottom of the chart. Yes, there is a reduction in gross margin compared to last year but we’re still 100 basis points in the half higher than pre-pandemic levels. So we’ve exited EBITDA margin at 10.6% in the B&M facia.
Heron Foods had a very strong performance in the half, above 6%. I’m happy with that level of performance, and the business has a lot of momentum heading into the second half. And France has gone from strength to strength, delivering an EBITDA margin of 9.6% in the half. And it’s important to remind ourselves that only 2 or 3 years ago that business was loss-making. So there is a lot of operational commercial momentum in France heading into the second half. Sales densities in the 3 businesses continue to be significantly higher than pre-pandemic levels. That has already increased again in Q2, and I expect this to continue to increase in the second half.
Key driver on B&M is a trading gross margin of 213 bps reduction in the year, and that is primarily gardening season, which started too late. We took proactive actions. I didn’t want to carry any stock. There is no merit in compromising the operational flow of business. We took the decision and we exited on a very clean stock position heading into the second half. To remind you what we said back in May, we guided for the full year a gross margin percentage at B&M to the tune of 120 to 130 bps moderation for the year. I’ve never provided a half 1 or half 2 split. I’ll expand why I think the second half is already in the right trajectory, but I maintain that level of guidance, which underpins a full year EBITDA range of £550 million to £600 million, which remains unchanged as in May.
If we summarize the margin position at a group level, we started pre-pandemic at 34.3%. It picked up 37.4% in the half last financial year, we’re at 35 bps. So what are the components of this margin? B&M U.K. 213 bps reduction on the half, primarily garden and season. Grocery gross margin, so FMCG, flat year-on-year, no change. That business is very steady. It’s always been steady. The business is maintaining a very strong price position, and there is no pressure on margins.
And what I would say at this stage is that nongrocery margin 7 weeks into the golden quarter is already at a significantly higher level than the first half, and it’s directionally consistent with what I said out back in May or today for the full year. And that’s an important point. Stock is clean. Inventory levels are now at the right level and the sell-through is very strong.
It’s not on the slide, but I’m going to share one interesting point that I think brings this to life. My Halloween — our Halloween sell-through is higher than last year’s. So I already have several categories in the business in non-grocery, not only improving ahead of the half but on a year-on-year basis, the gross margin percentage on what we call brown box is actually higher than last year. So I think it’s important to remember that what we’ve said for the full year 120 bps, 130 bps gross margin moderation, that’s how we have set the business into the second half, and we have been conservative on the buy. We don’t have any markdowns ahead of us, so I’m comfortable that the trajectory of the gross margin is consistent for the full year on what we set out to do.
Heron has performed strongly. And France goes without saying, I think France continues to build the leverage in terms of common buying on a brown box from the U.K. Gross margin is performing well. Sales are performing well. Costs are performing well. So the French business continues to have significant momentum.
Looking at the cost base. We set out a plan that we said operating costs for the B&M fascia will be basically flattish year-on-year regardless of the quarterly sales volatility. We exited the half virtually flat compared to last year. We exited at 23.9%, which is just 7 bps higher than half 1 last year. That’s not here nor there. And remember that achieving that level of operating leverage when we have a highly negative Q1 LFL, given the annualization of the prior year, I think the team has done a very strong job, whether it’s retail, whether it’s a transport and distribution to maintain very strong cost discipline in the business. I don’t expect any fundamental change getting into the second half. And to put this in context, the 23.9% is still 70 bps better cost base than pre-pandemic, okay?
Heron has had its own level of investments, which I think will moderate in the second half at 25.9% and you can see the level of B&M performance at 34.8%, significant improvement on the cost base compared to the prior half. If we look all of this at the group level in the half, our cost to sell is identical to last year, 25%. I expect that discipline to continue and carry forward into the second half.
So momentum. We concentrate on the blue lines first. That’s the 1-year LFL. We know that Q1 was highly negative, primarily because of the first 5 weeks on the prior year comparison and you remember that the last 8 weeks of the quarter, that started to improve markedly. We’ve exited quarter 2 up plus 2% LFL in the B&M business.
If you look at it on a 3-year basis, i.e., pre-pandemic, LFL has accelerated from just over 10% to above 14%. And what gives me significant confidence in the quality of the trade down happening from higher price point competitors? Trade down from higher price point competitors is that this trend is continuing into golden quarter. And the outlook, you have the 1 year, 6 weeks LFL is plus 2.5%.
I’m not going to do your job necessarily to work it out, but just a bit of a hint. If you try to calculate the 3-year LFL for the first 6 weeks of Q3, I’ll tell you that, that 3-year LFL is in excess of 19%. Just over 10%, just over 14%, 6 weeks into the golden quarter, 3-year basis in excess of 19%. That gives me confidence that the cost leverage of the business is well controlled. The stock is exactly where it needs to be at the right quantity and the sell-through on non-grocery is coming through.
One final point. The chart is not here, but it’s important also it’s on the RNS, another lead indicator for me. If I look at quarter 2 for the first 6, 7 weeks of quarter 3, my like-for-like transaction numbers compared to last year are positive. There isn’t a single week during the 13 weeks of Q2 or the 6 weeks of Q3, where my like-for-like transaction number, so that’s customer count, in any single week has been lower than last financial year comparable period. That again tells me that the volume is coming through. The trade down is happening, and we are just sticking to what we do well, which is raise or sharp pricing and very strong store execution across the whole business.
I’m not going to tell you which categories are these ones. I think some of you are familiar on the ups and downs. So this is Q1, Q2. Blue is grocery. The orange or light orange is non-grocery. So if you look at Q1 on the left-hand side, you have many negatives. And that’s not surprising because the first 5 weeks, we’re trading on a very tough comparison basis. But if you look at Q2, that’s the shape I would expect. Most of them are already on growth. Some of them are already in the trajectory to recover into Q3, but I’m cool with that. But I’m going to share only one, and I’m mindful that there is competition sensitivity here. So what is number P? Of course, it’s alcohol. People are drinking less. So I would expect alcohol to be on a negative LFL when they were stuck at home last year.
So fast forward, I think these categories are moving on transactions and LFL in exactly the direction I expected they would. So B&M. When we presented the prelims in May, we quoted against the big 4 on FMCG, and I have to be very careful here because I have the #1 P&G MD sitting at the back as a guest. We quoted 15% price comparison, cheaper than the big 4. I have no reason to believe that in this half and in Q3, that price position has done anything that marginally strengthen a bit further. I’m not going to quote you number, but you can take from these that against the big 4 competitors as we track identical SKUs, we are better than 15% price gap against that.
Going back to the grocery chart. If my price position is holding, my gross margin is steady and I’m seeing the transactions that points me to an underlying health position in the business where we are getting the traffic we need. Supplier collaboration is strong. It’s a very simple business. We don’t indulge in any complicated back-margin industries. It’s a very simple way how we transact with the FMCG brands that remains unchanged. And I think that allows us to keep flexible and drive the volume as we need.
Non-grocery. Look, I’m not going to expand on the sourcing model. You already know it, continues to be incredibly flexible. One highlight for you. If you walk into a store we have now launched our simply everyday brand across home with sharpened even further our price entry position to actually dial up the price credential we have on that category. Consumers are feeling the inflationary pressure. Consumers are feeling the macro environment, and I think it’s right that we continue to dial up what B&M does best, which is offer the best price possible on what is a very good quality product. You can see it on the ranges on the aisles. It’s selling very well. It’s trading, I think, in line with expectations.
And before you ask me the question, I will say that it’s not margin dilutive. Before I introduce one of my colleagues who is Gareth Bilton, Gareth is our B&M U.K. Retail Director. Gareth has been 23 years in the business. He is basically the person in charge of running the shops in the U.K. Since July, Gareth and I and a couple of more colleagues who are in the room, but I’m not going to introduce them today, we’ve done a significant amount of work to ensure that store standards, availability are to the highest possible level so we can drive that LFL performance. I’m just going to quote you 1 stat Gareth, myself and 2 more colleagues since early July, we’ve visited more than 1,000 shops.
I’m not talking about the regional teams, I’m not talking about the supervisors. It’s us. And this is unannounced. So I want Gareth to give a bit of the color what he’s been up to and what is the priority of the retail team. But I will ask you to connect what you’re going to hear from him with the momentum of like-for-like because the 2 are 2 sides of the same coin.
Gareth, come and join us.
Gareth Bilton
Thanks, Alex. Good morning, everybody. I just want to take a couple of minutes to expand on what Alex has just talked about. So he’s positioned it pretty well. So as you would expect, we’ve always had a reasonably strong focus on retail standards. But through quarter 2, particularly, we stepped that up. And as Alex has described, there was a small team that we set about visiting stores on and out. And the real objective of that was just for the senior retail team to see the store through the customer lens because that’s the important measure.
1,000 visits later, I think we’ve got a really good picture on that, and we’ve significantly stepped the store standards on. The shape and the color behind it was to, a, improve in-store availability to drive sales; b, make sure that the clear pricing message through the buying team was displayed in the stores and we landed that well. A key — another key factor was consistent execution of the events calendar and all of that price promotional activity that we run through to raise the standards across the store estate. And I think when we look back now, the output of that is that the gap between our best and worst stores now is much, much narrower, and the ceiling of the highest-performing stores have moved up. So if you picture it there, it’s kind of shifted this way to a much narrow band and the highest standard across the estate.
And that was set about to make sure that our stores are as good as they can be through a customer lens and that we start to think more about the customers journey through the store and drive those standards up. And we will continue that on. And all of these visits are conducted outside of the senior retail team. So it’s not the senior retail team marking their own homework. It’s a really unbiased view of the store estate. So that’s the store standards and we’ll continue that. I think if I were to summarize where we are, happy with the progress we’ve made. We’ve consistently stepped forward. There’s still room to grow, which is a good news, but we’re in a much better place than we were.
A couple of other points on the slide I just want to talk about. Alex has already mentioned 10 gross new store openings so far this year. There’s been 7 closures, which have been smaller, older stores, end of lease and 4 relocations. And the relocations are key. And I just want to touch on a relocation case study because it will be more of those to come. So there was a — we got a store in the south of England that was a pretty average store. It sat well within the average bands, 10 years trading coming to end of lease. We have the opportunity to renew the lease or move a unit on an adjacent retail park came available, which was a better retail park, bigger sales floor space, better car park, better competitors, better footfall. So we took that — the shop was in the same catchment area. We were able to retain all of the existing colleagues and the existing management team and move into that store.
What happened in that store is sales increased in the first week 237%. And actually, a number of weeks on, we are still pretty much within that band. Transactions increased 118% and the ATV was plus 55%, purely because the sales floor was bigger and it allowed a better mix of products in there. So as additional sales strategy, we’ve got relocations to think about. So I think from a retail perspective, as I stand today, I think our retail standards are better than they’ve been for a long time. We’re well placed through Q2 where we stepped on, well placed Q3 now to go into the next 7 weeks of peak trade.
Alejandro Russo
Can you [indiscernible] colleague now rhythm and colleague enthusiasm of seeing the results in the shops.
Gareth Bilton
In sales and in standards. So the — as you can imagine, the unannounced visits and scoring a store unannounced caused a little bit of emotion at the start. They’re good stores we’re really pleased, the poor stores — because we’re very transparent about these results. And we’re now in a place where this on and out score is a motivator. It’s a key driver in replan. It’s a key driver in setting store standards and almost you’ve got now, we’ve gone full circle to store managers wanting a mystery shop visit because they know that their store is in a good place. So that’s key.
And the second thing is the sales as we go through to peak trade now, stores are full, availability is better. The stores are telling the footfall is strong. We see our store managers really starting to reap the benefits of our stores being in a much better place. So I think all around, if I was to describe the emotion, it was this at the start and now it starts to level down and it’s actually driving some of the right behaviors. And it’s 100% improved the performance of our store managers and our field-based retail teams.
Alejandro Russo
Thank you, Gareth. Going to do justice to John Parry, who’s sitting in the back. John joined us from Asda a few months back. John runs basically supply chain transfer and distribution. He will have a chance to join us when we meet again in May. But I would say that from a supply chain perspective, we are significantly ahead in terms of productivity than where we were last year, and some of that is going to continue, which underpins all the retail work we’re doing.
France, I will organize in the spring, the right visit to France, it will be the right opportunity to meet everybody with the French team. So I’m not going to dwell a lot on France. But I would just say the business is in pretty good position. I will concentrate on this slide. We have been very tactical and thoughtful how we continue to expand some of the FMCG lines that continues to drive footfall. It’s a much closer proposition than what you see in the U.K. Non-grocery, which is a year low orange bar, continues to perform strongly.
The garments business is pretty much nonexistent. So that business is having broad-based LFL performance across the whole spectrum of categories. Store standards, exactly the same principle as the U.K. We’re doing exactly the same in France. Studies underpinning LFL momentum as well, okay? We’ve been very purposeful in sharing best practice across B&M, U.K., France and Heron and the team basically is tailoring what is appropriate for the French market, but you can work on the assumption that all of that momentum continues. We now of the 111 stores, we have 31, which is not mandated. So it’s our own store managers, and that gradual trajectory continues in which every new store we open is our own manager. And tactically, we expect in the medium term to have a much more balanced portfolio, let’s call it half of it our own stores, half of it on the mandated manager. So as we learn and tweak that becomes much more balanced.
Look, the business continues to open. We’ve done 4 new stores in the first half, 3 more to half, 7 in the year. They are performing well. The supply chain is resilient. The product in brown box non-grocery is the same. The French consumer is reacting to it and the pipeline is building for a higher level of growth next year. And you can assume that it will be not less than 10 new store openings next financial year in France.
So I’m comfortable the team, we’ve spent with all of them a couple of days, Monday and Tuesday in Lille. The key insight in France, the leadership team is now well bedded, stable. They are working well together, and they are getting the support where they need from the U.K. business. Now I’m going to introduce you to Tony Dobbs.
Tony, you’ve been 30 years at Heron.
Tony Dobbs
Yes.
Alejandro Russo
He used to be — Tony used to be the operations director before B&M bought Heron. Tony is with us in the same journey on store standards. You have 3 minutes on the floor, Tony, on some of the learnings on Heron in the last 12 months, and enjoy it.
Tony Dobbs
Thank you. Good morning, everybody. So for me, this is really to give you an idea of what I built this business on to give the performance of 14.6% increase on last year. It’s simple retailing — but simple retailing, we’ve had to push the boundaries with our warehouse face to be able to get more product into our stores that has been the game changer for what we’ve got in situ in stores now.
So the majority of the stores in the state have taken an additional 120 ambient . And those 120 ambient lines have been to give us a more credible range for what we can and need to sell through. But also 20% of the larger stores we’ve been able to put even more products into them for an even better range for what people need and require where we sit in the market. That market is convenience for us. So those 314 stores at best high street shopping center and most importantly, in neighborhoods. Neighborhoods where people can come to us with the hours that we can trade to help them with the big brands at the lowest possible prices.
But the niche part of our trading is what we do with clearance. Clearance is what excites our customers. So if you can get the basics in life from a Heron Food store, but the excitement comes when you see that here today, gone tomorrow offers. And that is right across every one of the ambient, frozen and chilled. So for us, on chilled, that has been probably our biggest challenge. Biggest challenge because we’ve had to give the customer a better offering on fresh, fresh produce, fresh meat, but what comes with fresh is waste.
But for us, waste is an investment in sales. That’s where we see the customer confidence to be able to come to us for those products for what they need. But also, we’ve really looked at how we can help the customer with these challenging times of the meal deal. We’ve seen the success with being able to give them the solution to the challenge of here you are. Just for instance on there, you’ve got this , the chicken breast, £4. Anywhere else, you would probably pay another £6. So for us, that has been able to help us give the customer our confidence again to shop with us not just as a frozen food store, this is a store that can supply the more credible range of what we do.
Frozen, this has been our biggest challenge — biggest challenge by a long shot. How we reinvigorate and put some passion back into getting frozen to look as good as fresh. And we’ve done that successfully with introducing what we’ve done with our new ready-meal range. Again, a very diverse range across from all of the different Indian styles, as you can see on that through to some different solutions we’ve put into the meal deal solution again in frozen. Just the last week, last week, frozen meal deal, £2.50 for fish, chips and [indiscernible] peas for 2 people, for 2 people.
It is what we need to do. And all of this is really underpinned by my experience in 30 years is it only comes from great people, great products and great price and Heron Foods has that now in the market. So exciting times ahead. And the momentum of what we’ve taken from that increase in H1 will continue with the foundations of what we’ve got there now. Back on to store standards, that has been something I’ve driven for 10 years, simple retailing.
Simple retailing is as far as my operational background is understanding what a manager have to do on a day-to-day life. So for me, I can give them the solution to be better at what they do. And for us, the store standards have been second to none, serious about standards has been the DNA of this business for 10 years and now the success of what we can deliver with those big brands at the lowest possible price, the customers really appreciate having that #1 priority of availability.
We cannot be without product for what that customer needs and that is the #1 principle we have in this business is availability. Followed by customer service that is the thing that we do exceptionally better than our competition. We leave that customer fulfilled of what they require, put a personal touch on customer service. So for us, I’m really excited for where we’re going to go over this next half year for what we’ve got in place now and the only point to success.
Alejandro Russo
Thank you, Tony. Thank you. I appreciate that. So to recap before we open to questions. The 3 phases, the 3 businesses are well set up for well in the quarter. We’re already on week 7 of 13 in the golden quarter. Business are performing well. Relentless focus on pricing, product, store standards. You will hear from me in the future more and more around store standards. Does it mean that product and price will take any back stage? It won’t, but I will keep coming back to you on store standards.
First 6 weeks at B&M U.K., plus 2.5%, that on a 3-year basis, it’s in excess of 19%. LFL transactions positive. It’s not ATV. It’s not inflation. It’s transactions. Gross margin will improve in the second half. I’ve already expanded on that. On a full year basis, I maintain the guidance I gave back in May where we expect a moderation compared to FY ’22 in the order of 120 to 130 basis points. I’m relaxed with that outlook. Cost and cash disciplines are absolutely better than the business. There will be no slippage on any of those. Stock is in the right place.
And we are confident that, that EBITDA margin is going to be materially above pre pandemic levels. In the second half, we’re going to open 10 to 12 additional B&M U.K. Stores, 3 in France and 8 in Heron. And to close, the guidance remains unchanged as in May pre-IFRS 16 between £550 million and £600 million EBITDA. So I will open now to questions.
Question-and-Answer Session
Q – Ben Hunt
Ben Hunt from Investec. If what you say is true that you’re staring at the moment on the barrels of good like-for-likes. Your gross margins seem to be in a pretty healthy position compared to where they were.
Alejandro Russo
You’re saying what I’m saying, it’s true. It has to be true. I would end up in jail if it wasn’t true.
Ben Hunt
And the leverage is fine. If I take the lower end of your guidance, it seems to imply that assuming the trajectory of sales at the moment is fine and you’ve got a fair amount of leeway in terms of margin for the second half. What’s stopping you’ve been from perhaps tightening up that guidance going into the full year?
Alejandro Russo
I think there’s time to do it. I’ve thought about it. I think the time to do it is early Christmas, January trading. I know exactly where we are, and that’s a moment to tighten it up.
Ben Hunt
And then the second question, which you’ve been a little bit quiet on the store pipeline. I know during the pandemic, there was legislation obviously that prevented you from perhaps taking some of these opportunities. I think that’s now cleared if I’m right in thinking. What’s holding you back again from — where is the softness in the pipeline?
Alejandro Russo
It is. But you have the 2 years or so of built-in delays. So yes, it’s below than where we want. Let’s assume we’re going to open 22 in the U.K. The medium-term target remains unchanged. We’re going to grow it up, but there is a bit of a catch-up. So look, I’m keeping the position in here, which is the right decision is never compromise on the quality of the asset. I can open plenty of high street, secondary or tertiary fight, why would I do that? This is a long-term game. No, I’m not going to get too worried in the short term about whether it’s 20 or 30. We need to build it up. But I think the message there is not compromising on the quality of the space.
Now the long-term potential is clear. And frankly, even at 22 this year when I compare what the competition is doing, I’m well ahead in relative terms to them. So I’m not losing space to them. So on absolute or relative terms, I’m fine with that.
Ben Hunt
Okay. Final question, if it’s okay. Last year, there was talk of trials of online. I was wondering how that’s been going? It feels like your competitors have been a little bit more positive online at the moment. What are your thoughts on that?
Alejandro Russo
It’s a very good question. Look, it’s a trial, no. I will update you when we get to the next touch point, which we remain is very contained trial, we’re learning. It’s early days.
David Roux
It’s David Roux from Bank of America. So just 2 questions from my side. Firstly, on the gross margin. Correct me if I’m wrong, but I assume that the full year non-grocery gross margin would still be above pre-pandemic levels. And if that is the case, I mean, what makes you confident that you can maintain this higher level of gross margin for non-grocery given that [indiscernible] demand is normalizing? And then my second is on stock levels. As it stands today, are there any categories where stock levels are still materially higher than pre-pandemic?
Alejandro Russo
Two good questions. Thank you, David. So the first one is — the case whomever created the bear 6 months ago, said non-grocery sales are going to follow the cliff that will unwind the gross margin benefit and/or the consumer demand is going to squeeze it. Price position is very sharp. By sales participation across the 2 elements of the store growth and non-grocery continue to perform well. I’m not sacrificing on price, product is looking good. The demand is there. I’m confident that the mix and those new customers allows me to maintain it, but at a much more reasonable moderated level, which is what we said, which is compared to FY ’22 in the 120 to 130 bps moderation, which is significantly higher still than pre-pandemic.
So fundamentally, it comes down the price position, the quality, the product is what B&M does well, and I’m comfortable, I’m confident that I can take share from the higher price point and specialists.
On your second question, no, stock is clean. Stock has come down to the tune of 50 million tonnes of cost compared to half 1 last year. I expect that to throw another little chunk by the time we get to half 1, stock is clean.
Adam Cochrane
It’s Adam Cochrane at Deutsche Bank. A couple of questions, please. Congratulations on being the first company, not to mention the U.S. dollar or consumer in a presentation, but would you be able to just talk about what the hedge rates for the U.S. dollar purchases are? What they look like into next year? Have you felt any of the impact of the stronger dollar as yet?
And secondly, you’ve been buying your products now for spring/summer of next year. What’s your outlook in terms of what are you buying towards in terms of units or even total sales? And then finally, if you gave the guidance of £120 million to £130 million down, yet the markdown was unexpected in the first half. I assume you didn’t plan on marking down garden inventory. What has gone better in order for you to meet that guidance?
Alejandro Russo
So let me try the first question. Everything we have spoken to is from the consumer. Store standards from the consumer lens, pricing from the consumer lens so we can help them, lowering prices, extended ranges to support consumers. So I will rephrase slightly your question. Everything we do at B&M is around the consumer, which is around razor sharp pricing, best product we can and presenting it in the consumer in the best possible way. Your second question was — remind me, Adam.
Adam Cochrane
So in terms of hedging.
Alejandro Russo
Hedging. So if you look at the detail on the RNS, we are well hedged all the way to September 2023, clear on a competitive basis, I cannot disclose it, but you will see that there is an asset on the hedge account in excess of £100 million, which tells you that my hedge position over the next 12 months is well in the money. And to your final question on gardening. Look, it came a bit later. Ideally, on the garden category, you won the first heat wave to hit you ideally late March, early April. We had to make a decision. We basically dealt with the stock and it’s clean.
Adam Cochrane
I think it’s more not debating whether it’s the right decision. It’s more if it was unexpected, how are you still within the guidance range? Something must have moved the other way in order for the guidance range to still…
Alejandro Russo
I never guided on half 1 and half 2. I think the business has sufficient resilience to be able to accommodate that. And I think maybe the point, which I mentioned in the second half is that we have taken a prudent position on the buy for the second half given the consumer and macro environment to make sure that we are not taking any unnecessary risks and having any unexpected markdown.
Adam Cochrane
Is that prudent by continue into next year as well?
Alejandro Russo
Absolutely.
Adam Cochrane
And by prudent, what do you mean roughly?
Alejandro Russo
Sufficient growth are being cognizant of what the consumer pressures are. If that helps you, still positive LFL growth next year.
Nick Coulter
Nick Coulter from Citi. Can I ask on SG&A inflation and notably energy and staff both in the half and then your outlook. I don’t know if there’s an asset on the balance sheet for energy.
Alejandro Russo
We don’t hedge energy. We only hedge orders.
Nick Coulter
And then secondly, just to follow up on inventory. In the half, is that £50 million move all just volume or units? Or is there a cost per unit move as well? I guess, hinting underlying inflation on a like-for-like basis?
Alejandro Russo
Yes. So energy, look, of the 3 businesses, the business that is more susceptible to energy by definition in Heron is refrigeration. In B&M, I don’t expect energy to fundamentally change the dial in the second half. As I said back in May, look, it’s plus/minus 10 bps all in, in the mix. The only business that we have hedged and well hedged on energy is actually France that proceeds on pre-pandemic. It has its own French peculiarities. But I don’t expect to fundamentally change the equation in the second half.
To your question on stock.
Nick Coulter
Is just on staff as well as its possible to get a comment there in terms of inflation on wages.
Alejandro Russo
Cost to sale ratio remains unchanged. No. So how we run the business and we’ll flex accordingly. And to your question on stock, it’s, of course, units and values both.
Nick Coulter
So I guess just on staff, we see the wage inflation is quite notable in the market at the moment. But if you’ve got very little like-for-like inflation going through your top line, but your transactions are up. I’m just kind of struggling to balance that equation, I guess?
Alejandro Russo
What you have is a multitude of mix elements, some categories?
Nick Coulter
The mix is a balance?
Alejandro Russo
Yes.
Warwick Okines
Warwick Okines, BNP Paribas Exane. Two questions, please. Just on current trading, forgive me, but you’ve been quite robust on the gross margin performance of general merchandise and et cetera, but you haven’t particularly talked about the mix effects between categories. Can we assume that, that balanced mix between general merchandise and groceries continued into Q3?
Alejandro Russo
Within long-term parameters, they are stable.
Warwick Okines
Yes. So January, March could even be flat to up in early trading.
Alejandro Russo
Yes.
Warwick Okines
Yes. And secondly, you talked about the store pipeline a little bit. Could I just ping you down on your thoughts, early thoughts for the outer year. What sort of gross number should we think about for the year to March ’24?
Alejandro Russo
Difficult for me given an environment to give you a precise number, why we never do it, but look, I cannot imagine it’s going to be any less than the current year, and I will be driving the focus to be higher than that number. I will firm that up when we are closer to the end of the second half.
Simon Bowler
Simon Bowler from Numis. Two questions, if I may. Income in certain kind of as you think about it, transactions resulted — transactions isn’t the same as volumes. I just wondering if you can talk a little bit in terms of what you’ve seen from average transaction values and what we may infer from that from a volume perspective?
And secondly, I was wondering if you could give a little bit more color on kind of that first half gross margin piece. I appreciate the comments you made around the garden category. But given the size of our cap, it feels like some other moving parts of that gross margin as well. Is that a fair assumption of any of the bits that we should be aware of?
Alejandro Russo
So first question, thanks, Simon. If you look at it at the simplest broad level of growth on growth rate, the sales participation are within normal historical tolerance. But within each of them, you have significant movements in terms of ATV yes? So I don’t want to be too specific on the categories, but I will mention one. If you think about, let’s say, pet foods, Pet foods will be booming for us on volume. Alcohol is the other extreme, yes. So given the amount of categories we have, I would argue that an inflation average measure is totally meaningless because you have too many moving parts in — within grocery and non-grocery.
ATV will be broadly within historical levels, but the metric that I’m very focused, Simon, is on those transaction numbers because ultimately, that is, for me, the lead test on how many consumers I’m getting into — new consumers who are getting into the business. So I’m not dodging the issue, but we have 25 categories and probably in excess of 100 of categories. So an inflation average number doesn’t tell me much. The pricing position, whether it’s grocery or non-grocery remains very robust. And that’s what gives me the confidence that in the second half of the year, given sell-throughs and the buy position, which is measured and conservative given the consumer and macro environment gives me confidence that the run rate would head in the right direction.
On your question on non-grocery. Yes, of course, there are moving bits. But I would say the material number is in the gardening category. Next question.
Dave, do you want to take any calls from the — any questions from there?
Dave McCarthy
There’s no questions online. If anyone is online, we’ve got time for another two questions. So please submit a question, if not, we can draw stops.
Alejandro Russo
Excellent. We’re on time. Thank you, everybody, for coming. Bye, bye.
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