B&M European Value Retail: A High-Margin UK Discount Giant Trading at a Bargain—Deep Dive into Financial Strength, Competitive Moat, and Growth Potential
Great write up! A potentially naïve question - Why does B&M keep so much debt on the balance sheet? You stated multiple times that it is fairly conservative (5x interest coverage including lease interest), but for a highly cash generative business, what is the benefit? Why not reduce debt? The 8.125% bond for example seems unnecessary? Apologies if this sounds stupid but I have very limited experience in researching retailers!
In your opinion what are the most prominent threats to B&M?
That’s a great question, i also prefer less debt because of personal instincts. On the other hand, if the company believes it makes more than 8.125% on that money, than it makes sense to use debt, actually it needs to earn less than 8% due to tax benefits of debt payment.
The biggest risk would be competition that pushes margins down in my opinion.
Brilliant article - thanks for sharing this openly! As a supplier to them I know their procurement is a) frustrating for me b) brilliant for shareholders
Can I ask a question for my education? How do you account for leases in capital expenditure when doing the DCF? Do you assume an increase in ROU assets alongside PPE capex? And then net off lease liabilities?
Or is it enough to simply add back the imputed interest, not add back lease depreciation in FCF? So capturing full lease expense in FCF and not subtract lease liabilities to avoid a double count and allow for new leases to be captured in an ongoing increase in lease payments in FCF?
Hi Tom, I appreciate your feedback, that's one of the top reasons I started this publication, to get feedback on my thesis especially people who touches the company clients, suppliers. And another reason was to get feedback on my process. So double check for you :)
As a principle, I would to like to simplify process as much as I can without losing accuracy. I used the second approach in this case. For me actually leases are operating expenses, I haven't explicitly set and make calculations in the post because both are deducted before tax applications. One should check though if leases are pushing the liabilities to future, but generally that's not the case.
I haven't explicitly deal with growth Capex, because in BME case, it is asset light Capex (1-2%), so I can think it also as a part of operations given that operating margin could fluctuate more than that.
The ultimate goal is to estimate how much cash is remaining to equity owners. In this case we now the dividend payments, and we can see that the cash is directly translated to dividends, so that was a sanity check for me.
Got it thanks for the quick reply and the double check haha. I think that makes sense and is how I’ve approached it, with then leases as operating expenses scaling with revenue
Loving almost everything you are publishing at the moment!
The redomicle will also allow BME to potentially repurchase shares - per their FY25 presentation - which should be more tax effective and accretive to shareholders.
Any idea why being domiciled in Luxembourg doesn't allow share buybacks?
Great write up! A potentially naïve question - Why does B&M keep so much debt on the balance sheet? You stated multiple times that it is fairly conservative (5x interest coverage including lease interest), but for a highly cash generative business, what is the benefit? Why not reduce debt? The 8.125% bond for example seems unnecessary? Apologies if this sounds stupid but I have very limited experience in researching retailers!
In your opinion what are the most prominent threats to B&M?
Thanks for the insights!
That’s a great question, i also prefer less debt because of personal instincts. On the other hand, if the company believes it makes more than 8.125% on that money, than it makes sense to use debt, actually it needs to earn less than 8% due to tax benefits of debt payment.
The biggest risk would be competition that pushes margins down in my opinion.
Brilliant article - thanks for sharing this openly! As a supplier to them I know their procurement is a) frustrating for me b) brilliant for shareholders
Can I ask a question for my education? How do you account for leases in capital expenditure when doing the DCF? Do you assume an increase in ROU assets alongside PPE capex? And then net off lease liabilities?
Or is it enough to simply add back the imputed interest, not add back lease depreciation in FCF? So capturing full lease expense in FCF and not subtract lease liabilities to avoid a double count and allow for new leases to be captured in an ongoing increase in lease payments in FCF?
Or something else entirely?
I’d be so grateful for your help!
Hi Tom, I appreciate your feedback, that's one of the top reasons I started this publication, to get feedback on my thesis especially people who touches the company clients, suppliers. And another reason was to get feedback on my process. So double check for you :)
As a principle, I would to like to simplify process as much as I can without losing accuracy. I used the second approach in this case. For me actually leases are operating expenses, I haven't explicitly set and make calculations in the post because both are deducted before tax applications. One should check though if leases are pushing the liabilities to future, but generally that's not the case.
I haven't explicitly deal with growth Capex, because in BME case, it is asset light Capex (1-2%), so I can think it also as a part of operations given that operating margin could fluctuate more than that.
The ultimate goal is to estimate how much cash is remaining to equity owners. In this case we now the dividend payments, and we can see that the cash is directly translated to dividends, so that was a sanity check for me.
Got it thanks for the quick reply and the double check haha. I think that makes sense and is how I’ve approached it, with then leases as operating expenses scaling with revenue
Loving almost everything you are publishing at the moment!
I'm glad to hear that, thanks for sharing that's motivating!
Such a great in-depth analysis that I will never be able to shop at B&M without thinking about their CEO succession again! Thanks for sharing.
The redomicle will also allow BME to potentially repurchase shares - per their FY25 presentation - which should be more tax effective and accretive to shareholders.
Any idea why being domiciled in Luxembourg doesn't allow share buybacks?
The tax ın the dividends would be different but I don’t know the reason for buybacks.
No worries - thanks for the reply. Love your work!