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Edited Transcript of BME.L earnings conference call or presentation 17-Nov-15 8:30am GMT

Thomson Reuters StreetEvents

Half Year 2016 B&M European Value Retail SA Earnings Call

London Apr 24, 2017 (Thomson StreetEvents) -- Edited Transcript of B&M European Value Retail SA earnings conference call or presentation Tuesday, November 17, 2015 at 8:30:00am GMT

TEXT version of Transcript


Corporate Participants


* Simon Arora

B&M European Value Retail SA - CEO

* Paul McDonald

B&M European Value Retail SA - CFO


Conference Call Participants


* Jonathan Pritchard

Peel Hunt Limited - Analyst

* Warwick Okines

Deutsche Bank Equity Research - Analyst

* Andrew Porch

HSBC - Analyst

* Simon Irwin

Credit Suisse - Analyst

* Fraser Ramzan

Nomura - Analyst

* Claire Huff

RBC Capital Markets - Analyst

* Rob Joyce

Goldman Sachs - Analyst

* Caroline Gulliver

Jefferies - Analyst

* Adam Cochrane

UBS - Analyst

* Matthew Taylor

Numis Securities - Analyst




Simon Arora, B&M European Value Retail SA - CEO [1]


Good morning, everyone, and welcome on this rather gray morning but thank you for coming out. As usual, I thought I could spend a couple of minutes just giving you some headlines on our announcement this morning before passing over to my colleague Paul who will run you through some of the more detailed numbers.

So I guess the key headline, of course, is that our business continues to grow its top line. Our business over that six-month period increased its revenues by 25%, which is extremely pleasing. And, obviously, the number one driver behind that is a record rate of store opening, a material step change in our rate of growth in terms of new stores which is exactly 47 net new stores over a six-month period in the UK and that, just by way of reminder, compares to only 20 the same period the previous year. So we are absolutely taking advantage of the very favorable property conditions, retail property market conditions out there in the UK at the moment.

Meanwhile, our German business is progressing to plan. It has also opened some new stores, they are trading well and indeed we have three more openings in our German business between now and Christmas. So that's all extremely satisfactory.

Turning to our UK like-for-likes, you'll see that they are stable, consistent with the previous quarter and at 1.2% are entirely pleasing in the context of a market whereby some of the larger traditional players are experiencing negative like-for-likes, a market where there's price deflation in core grocery and indeed in the context of a business that's laying down 25% additional space over the period being reported upon. As a consequence of this growth, our EBITDA has grown nicely and indeed our pretax profit on an adjusted basis is exactly 25% growth in line with the revenue growth.

What a P&L doesn't capture is that over the period we have commissioned two new distribution centers, totaling some 800,000 square feet here in the UK. And that major investment both in terms of capacity and in terms of central overhead is testament to the confidence with which we face the future and our ability to grow our business here in the UK.

Meanwhile, we are a cash generative business, notwithstanding the fact we are a growth retailer. And as a consequence we declare today our interim dividend of 1.6p per share, which again is in line with what we had asked investors to think about as they invest in or business some one year ago at the time of the IPO.

So with that I will pass over to Paul who will run you through some of the detail. Thank you.


Paul McDonald, B&M European Value Retail SA - CFO [2]


Good morning and thanks, Simon. Just to flick onto, let's, see some of the key numbers around in terms of our actual detailed profit performance, as Simon has mentioned probably key figure to focus on is the growth in adjusted profit before tax at 25%. And over the next few slides we will go through some of the key drivers behind those numbers.

Just apologize in advance, some of these bridges are relatively familiar and we have shown these before actually. But we certainly feel it's a good way to reflect how the business is growing.

And yet again probably the key messages here, if you look at in terms of our key growth driver going from GBP740 million to GBP930 million of sales is the new stores. Within those two new -- within the new stores you have got the orange bar which is the impact of the annualization of the 52 stores we opened in the year to March 2015, and then the GBP73 has come from the net 47 stores that we actually opened in the first half of this financial year. But as you can see, I'd say the key driver in terms of that growth is actually, in terms of that revenue growth is absolutely the new store performance.

Just touch on Jawoll briefly, Jawoll generated additional revenues of GBP10 million. A key point to mention there, this was -- this year was a six-month period, we only had Jawoll for five months last year. So a lot of that growth is actually bound up in the fact that you've got that April of trading this year that we didn't have last year.

Just moving on in terms of our in terms of an EBITDA bridge, yet again just to reiterate the key moves, we've increased from GBP73 million to GBP87 million. But if you look at that key driver of growth the new stores it is absolutely the key factor behind that with a much generated EBITDA contribution of GBP70 million.

And if you just put that into context in terms of the LFLs, obviously we've seen before we had a 1% increase in LFL sales growth. And in terms of the LFL stores you can see it's actually a relatively small contribution. So actually even so we have grown by GBP1 million at 1%, that has generated a little bit of extra growth from our new -- from those LFL stores.

In terms of gross profit, yet again this relates to the entirely to our LFL store base. I think we probably previously indicated that we would probably see a little bit of margin weakness in this half. We will touch on that shortly.

Although there predominantly related to central overheads and I think probably at our last results presentation we actually described actually one of the investments we made was actually in opening two new warehouses of which we anticipated around GBP4 million costs annualized from actually in terms of those costs. And largely that GBP3 million largely relates to that investment in the opening of those new warehouses in the first half of the year.

Just the last two bars relate to Germany. As I touched on previously you get some more EBITDA coming from A from the fact that we had that extra month of trading. The business has grown slightly in terms of LFL terms, and we have had actually opened a number of a handful of new stores in that half as well actually.

And the last factor just to bring you in, in terms of Germany we've seen a 12% difference in terms of currency just because of the fact it was a roundabout EUR1.25 last year compared to around about EUR1.38 this year against the euro. So we have had some translational differences.

Just to kind of quickly just to, we've spoken about this already but in terms of our LFL sales performance I'd say Q2 was 1.3% which was just slightly ahead of what we did in the first half of the year. And in the first quarter and for the half year ended at 1.2%.

I'll move on to just add a little bit more color around gross margin. I think the last time we spoke we referred to the fact that the business was facing a headwind in terms of currency this year. And certainly in terms of the UK we were working on a slightly lower FX rate, and we guided basically the markets to think actually for the year we were thinking about actually could cost us 20 basis points overall.

And broadly our margins have actually fallen in line with that particular guidance. UK margins were actually 11 basis points down. As I say, the impact of the FX, the FX headwind that we faced, but also we've had a benefit in terms of our new stores.

On average these stores have been slightly larger. As a result of that, they sell more of the general merchandise and you get a slightly favorable mix impact coming through from those new store openings.

Jawoll, equally so Jawoll margins have reduced by just over 100 basis points just reflecting yet again they are certainly not immune to what has been happening between the euro and the dollar. Whether they buy directly from China as a business or whether they actually source through European wholesalers, ultimately that feeds back through into their cost prices.

Probably just a couple of points just to reiterate, yet again in terms of our margin percentage we do constantly look to just reinvest in price. So to the extent that we do get any sorts of gains from any kind of sourcing benefit at all, we will continue to look in terms of a reinvesting that in price. So if you had certainly looked at our gross margin of the last two years in terms of historics you would find it is very, very consistent actually around this time around this 35% level.

The last point to mention is in terms of any of the analysis if you look at in terms of where our price competitiveness is against the UK grocery sector broadly remains unchanged.

In terms of operating costs, I think probably a couple of things to mention. You've seen in the UK our cost as a percentage of sales have increased by about 40 basis points.

A couple of things to really focus on here, about half of that is just down to the fact that, as I described previously, the fact that we have opened these two new warehouses in the UK. And as I say previously we indicated there was an extra [four] across the year. So you see those costs coming through.

Additionally, as part of that actually opening of those new warehouses we have also recruited somewhere in the region of 1,200 extra DC colleagues. Taking those colleagues on in advance, you take them on two months in advance if you are training those guys so you effectively have got two months worth of cost for which actually you've hardly move any boxes at all. So there's some one-off OpEx costs we've incurred in the half just actually making sure that those warehouses are up to speed and the staff are appropriately trained.

In terms of Jawoll, pretty much in line with where they were last year really. So nothing particularly color to add on that point.

Then I'll move on to exceptional items. Probably only real point to mention is the pre-opening costs. Last year very much the same as previous year, they averaged just under roundabout GBP100,000, just slightly less than GBP100,000 per store, so very consistent with last year.

One thing that is probably worth touching actually, I know we do actually show these exceptional lines but if you look at the increase from GBP2 million to GBP4.5 million it actually it's roundabout 25 basis points in terms of EBITDA margin. So we think it's the right to actually separated ours, it's easy for people to see. And the last point to mention, and we got a fair value movement in terms of where we finished in terms of FX as well, which is a slight gain -- a gain in the period.

Interest, two things, only thing to mention really in terms of our core this breaks it down into, if you remember last year clearly we had our IPO -- our previous capital structure in place. So if you look at the top line, our interest bill has actually come down from just under GBP13 million to GBP10.7 million, which is just entirely bound up into a slightly lower quantum of debt and also actually the margins that we are paying upon that debt. And we won't go back into some of the things we spoke about last year as capital structure.

Moving on to cash flow, yet again a couple of things to chat you through really. I think yet again the business despite, in terms of big picture despite the businesses opened net 47 stores, we've opened two new warehouses the business still remains hugely cash generative over that period of time.

A couple of things probably worth touching briefly in terms of working capital, slight increase, bigger increase in working capital, largely down to a timing difference in terms of stock. And just to reassure you, our autumn-winter stock was all in place at the end of September where it was a little bit slower last year really. So very happy with our overall stock position.

I'd say you look at the key lines of CapEx, obviously, you see the huge increase in new store CapEx reflected in the additional 47, net 47 stores. Infrastructure CapEx is predominantly related to the costs we incurred after the two new warehouses we opened in terms of additional racking and some of the various fit-out costs. And as always we always have a level of maintenance CapEx.

But despite the fact we have those investments cash flow remains extremely strong. If you just take that down to the in terms of the meters or the net debt to EBITDA, I'd say we have spoken about the fact this is a highly cash generative business model. And if you look at our net debt to adjusted EBITDA basically on a 12-month basis you will see it's actually going to reduce from 2.8 times to 2.2 times. So very much in this theme of the business deleveraging by about half a turn a year actually which is certainly consistent with what we've seen previously and certainly consistent with I think most analyst forecasts for this year.


Simon Arora, B&M European Value Retail SA - CEO [3]


Thank you, Paul. So if I may, what I'd like to do is if we turn to page 14 I thought it would be useful just to remind ourselves what is B&M and where does it sit in the market. Because we do think B&M is quite an unusual creature in terms of UK retailing in that we certainly aren't a pound shop, we are not a category specialist nor are we a full-service supermarket.

We sit in the middle and as a consequence we fish in a very large pond. And the reason why I thought it would be useful just to reiterate this is that it really does give you a sense of the size of the market in which we compete, and hence the opportunity we have to grow our market share without really coming up against any constraints around percentage market share. So whether it is in general merchandise, GBP127 billion market or whether it's in the broader grocery market which is GBP150 billion odd or indeed just the core variety of retailers and pound shops at a more modest GBP7 billion, our revenues of circa GBP1.5 billion a year are very small indeed and hence we do feel there's plenty of headroom for growth.

And on the topic of growth, clearly what we should be doing as a business is continuing down that journey of being what was a regional retailer to becoming a national retailer here in the UK. So these heat maps or this story density map gives you a picture of where we are today. The one on the right is the position as at the period end just been reported on as at the end of the first half, and you see we now have 472 stores.

But what is hopefully evident from that map is that large parts of the country are deeply underrepresented or underpenetrated by B&M. And indeed even within what you might consider our heartland of the Midlands, Yorkshire, South Wales there's still plenty more penetration to be had.

Which brings me, of course, to what have we been doing over the last six months in terms of the 47 store openings that you saw on the earlier slide. We thought we would share with you some detail on exactly where those stores are opening.

So if you look at the map and the little dots, there are 47 new stores there and what jumps off the page is the fact that this isn't just about opening stores in the South. Indeed, only 20 stores out of the 47 are south of that line that we've shown there, that line, that red line between the 7 and the wash. And so more than half of the stores we opened are in our traditional territory of the Midlands and above.

When you ask yourself the question, well, where are the stores coming from, why is it that we are able to open 47 rather than just 20 to previous year, as previously outlined it's because A, traditional retailers are rightsizing their estates. That is a very strong source of new stores for us.

There is the vanilla run-of-the-mill lease expiries whereby you do a deal with a landlord because a previous tenant has vacated. But actually what's really coming through quite strongly in particular of in the pipeline for next year is much greater confidence in the property development market, and hence a lot more opportunities for build to suit, you build development where it's purpose built for B&M the perfect size, the perfect configuration. So that's a real positive.

So just to summarize, we are absolutely on target to open the 80 stores that we said we would do this financial year. To put that into context, at the time of the IPO we were saying 40 stores, we increased that guidance to 60 but we are very confident now of achieving the 80 stores this year. And certainly when we look further out towards next financial year we are, again, on target to hit 50 stores because that is what we think is a sensible run rate for B&M in terms of a steady jog of rolling out our store estate here in the UK.

The bubble that we put on the page is not data we have shared with you previously but we thought we would do so now, which is to give you a sense of the deliberate, expected impact on our like-for-like measure by virtue of this store rollout. So when you think about a business that's laying down in the UK 25% additional space, what we are saying to you is that rather than a like-for-like performance of the 1.3% that you have seen, if we had adjusted for the deliberate planned cannibalization, actually our reported number would have been 2.5% like-for-like.

Now when we evaluate those new stores we fully take on board the impact on expected IRR return on investment of opening a store two, three miles away from another store. But we do take the view that it still makes sense to open that store because the returns are so generous.

Before we come onto those store returns I just wanted to reflect further on the UK store target because it's a number that's worth bearing in mind. So at the time of the IPO we shared with you that we had commissioned some external analysis and market research to understand the scope of opportunity here in the UK. And by way of reminder, what we did is we had the 4,500 retail catchments in the UK screened.

We applied six different rigorous criteria to get to what we saw as a conservative, sensible UK store target. And those criteria are ones that you see on the page i.e., proximity to existing stores, population density, local demographics, competitive intensity and rent affordability. And applying all those criteria get you to 850 stores as a UK store target.

It's worth knowing that of the 472 stores we have now and the 84 stores we have opened in the last 12 months, a material number of those break these rules. In other words, we have opened stores that don't meet the strict criteria on socioeconomic demographics for the catchment, that don't necessarily meet the criteria for proximity to an existing B&M store but actually they are perfect good stores.

So in a sense that gives us comfort that the 850 store target is entirely achievable. We are very happy with that number. And indeed there is every possibility that we could here in the UK open more than 850 stores, albeit I would express some caution around the fact that actually that's not a problem for today, that's a problem for a few years time. Because if we are talking about opening say 50 stores next financial year you will see that it is a few years before we need to start thinking about actually what is the opportunity to go further than the 850.

I mentioned earlier that we are very happy with the returns we are getting from the new space that we are laying down, and so we thought we would update for you some up-to-date data on those returns from the new stores. So the figures on the left-hand side of page 18 give you an up-to-date read on the returns we are achieving from the 67 stores, in other words a good sized data set, 67 stores that were opened over 2013 and 2014 that have traded a full 12 months. So in other words, no noise around timing or whether you got Christmas or didn't get Christmas and a full, decent sized data set of 67 stores so you get some comfort around what's happening in terms of the new space that we are putting down.

What you see is that our stores are generating on average GBP700,000 worth of store contribution but only cost about GBP400,000 to fit out. So we have a payback period of some seven months which is, frankly, best-in-class. We have not seen another retail business that's able to open stores that pay for their CapEx in six to seven months. And even when you adjust for the working capital impact of growing our business we have a payback that's extremely generous of around 14 months.

The right-hand side of the page reminds you about the maturity profile of a typical new B&M. Our stores are not those sort of retail stores that need two or three years to mature or indeed need an extended period in which to become profitable. Our stores are profitable from day one and, in fact, they overtrade for the first 10 to 12 weeks.

The chart on the right-hand side of the page shows you against an index of 100 actually a new B&M store for the first 10 to 12 weeks trades on average at 120% versus that 100 index. After that 10- to 12-week period the store starts behaving like the rest of the mature estate.

Now that's great because it means your stores are immediately profitable. A slight disadvantage is that actually when you think about our like-for-like estate we don't get a natural tailwind from a maturing estate that eventually runs out of steam. Our like-for-likes are genuinely achieved through better retailing.

But what we share with you here on the page, again, for the first time is the fact that by virtue of our like-for-like methodology, in other words putting into the like-for-like estate calculation any store as soon as it's open for the 53rd week. So in other words, at any one time we have stores within our like-for-like estate that are being compared against their opening halo. What we share with you here is the impact on that reported like-for-like, and actually it's about 50 basis points.

So when we look at our numbers on a week-to-week basis we know that a number of those stores are going to be negative like-for-like however good the store manager is, however good the merchandise offer is. But actually that's just fine, it's just the fact that they are up against that opening 10- to 12-week period when shoppers are coming in in their droves to see what this new store is all about that's opened in their town.

Turning now to product because we are, of course, all about our product and our prices. And it would be remiss not to talk about what we are doing on the shelves. Some key highlights are as follows.

First of all, grocery in the broader sense including our toiletries, our cleaning goods, etc., remain positive like-for-like even though the market broadly is deflationary, especially in core food. So we are very pleased with that performance over that first hat.

As Paul mentioned, it's very important that we maintain our price leadership versus traditional retailers. And we are happy that we continue to do so.

Moving to non-grocery, there are always things that we can do better. Over the six-month period just been reported on we have had particular success on indoor furniture where in those larger stores that we have been opening we have the space in which to display those products suitably. Generally across the piece we continue as a business to invest in our buying teams, our design teams, our global trips looking for design inspiration and looking for the next new bestseller and we are constantly innovating.

So some little examples here on the page for you, within confectionery we've brought out a range of retro nostalgic American candy, large parts of which are exclusive to B&M. On home improvement we have changed from a one paint brand to another we now have the UK as a leading paint brand on our shelves, Dulux paint which is working well. And indeed moving to stationary we now have a range of extremely competitively priced greeting cards that serve a nice impulse buy proposition as customers are browsing our aisles.

Paul mentioned a number of times and I have as well the fact that as we are a high-growth retailer with top-line growth of 25%, it's important that we continue to invest to achieve this growth for years to come. So when you think about our UK business growing at quite a rate of [not], one of the quotes that I shared with a journalist is that our UK business is growing at an annualized rate of GBP400 million a year.

So what you should think about is that actually every couple of years our growth is akin to that of a midsize a mid-cap UK retailer, just our growth. And really what a P&L doesn't capture is what that requires in terms of warehouse space, lorries, HGV drivers, store colleagues, new store managers, etc., etc.

So we are doing all the things to make sure that our growth is sustainable be that strengthening our pool of store managers in waiting. We have invested in field operations, so we've moved from three regions and teams around three regions now to four regions. And as mentioned earlier, for our current peak we have 1,200 new colleagues within our distribution footprint to make sure that we are well prepared for the rush of the next six weeks.

And specifically when you think about warehousing as mentioned we have now successfully commissioned some additional warehouse space, but as is inevitable with any large megashed you have a short-term pain. The reality is when you have new sheds of 0.5 million square feet with hundreds of brand-new employees, inevitably the productivity from those sheds is not the same as the rest of the distribution infrastructure and indeed the picking accuracy is not as good as the rest of the established infrastructure. So you have some short-term pain but in a sense that's a high-quality problem because I'd rather be opening more sheds than closing capacity which some of our traditional competitors and retailers are currently doing.

Turning now to Germany, as Paul mentioned it's a stable environment out there. The core business is performing well. However, there is some headwind around gross margin erosion simply from the fact that the euro buys less dollars than it did this time last year.

That was to be expected. And effectively there's just a period of time before that gets passed on to the consumer as the entirety of German retailers absorb these additional costs in their purchases.

We continue to open new stores, both trial stores and stores that are consistent with their existing format. And so over this calendar year we will have opened six new stores. As flagged in previous presentations, we continue on a journey of using the B&M supply base to have greater price competitiveness, better quality product on the shelves of the Jawoll business, in other words try to achieve the synergies with a rationale of this acquisition and that's all going in the right direction. There are some now 1,700 SKUs on the shelves of Jawoll that have been sourced from the B&M supply base.

The German business is well underway in increasing its own warehouse expansion. And by April of next year we will have additional space that will have cost some EUR4 million, which will allow us to continue to open up new stores next year. And we are doing the right things in terms of people to make sure we have the management team in place to find those stores for that organic growth. We continue to speak to other privately owned, smaller variety goods retailers in Germany that are typically family owned, owner managed whereby we see them as being a good fit for our core business, the Jawoll business which we see as a platform for rolling out a national retailer in that market.

So finally just to conclude before we get to Q&A, perhaps just give you some sentiment, some thoughts in terms of the outlook for the full year. We are delighted with top-line growth. We are delighted with the new stores we've opened, and whilst we accept that there will be some deliberate impact on like-for-like by virtue of putting down that rate of sales growth, it's the right thing to do in the context of the returns that those new stores generate.

We are pleased that we now have the capacity to allow further growth for the next few years and we are delighted that our stores now are full, ready and trading for the Christmas peak. The market is competitive. Doesn't take a rocket scientist to work out for the first half of this current quarter the unusually mild temperatures have been challenging.

Being blunt, if you have on your shelves deicer, hats, gloves, scarves, electric heaters, 13.5 tog duvets, blankets, if the weather outside is 15, 16 degrees Celsius it's going to be a hard sell. So, yes, it's been a challenging start to the current quarter, but I think that is the case for most retailers out there with seasonal product.

Turning to our German business, all going to plan, opening more stores and increased distribution capacity all going on track. Ironically the mild weather, which is also taking place in Germany right now, is actually good for the construction site where the warehouse expansion is taking place. So the construction manager is actually happy with the current weather.

But cutting to the chase, we are confident of meeting your full-year expectations of our earnings. We reiterate that this is a business that has uniquely healthy cash flows. And whilst we've got all to play for in the next six weeks in big picture terms we are very happy with the way the world sits.

As a final point, just to advise you over the coming months we will as a Board be thinking about the most appropriate capital structure for this business in the context of our growth. But the somewhat unusual cash generation profile of our business whereby even notwithstanding that growth we do have surplus cash.

So that's where we are at the moment and so why don't we go straight to questions for the next 20 minutes or so. Thank you.

There is going to be a mic. If you will be kind enough to put your hand up then we will take those questions.


Questions and Answers


Jonathan Pritchard, Peel Hunt Limited - Analyst [1]


Hi, Jonathan Pritchard at Peel Hunt. Early days I know, but could you just talk us through a few of the maths of the payback on German stores?

And just bit of detail if you could on the sales mix. You mentioned that it was a slightly sort of better gross margin mix in the larger stores you are opening. Just a few sort of percentages of this in the sales mix, please.


Simon Arora, B&M European Value Retail SA - CEO [2]


So the German business shares the exceptionally strong new store returns that we have. Where you think about the UK business having a payback on its CapEx in less than seven months, the German business will be not far from that, maybe a month or two more. So it's a very similar environment.

And what that comes from is the fact that within our stores we don't have room displays, we don't have chillers, freezers, refrigeration. We don't have shop window displays, we don't have changing rooms, etc., etc.

So you struggle to find things to spend on. Frankly, our business model is all about the product and the price being on the shelf in a clean, well lit environment and you don't need to do much more than that. So that's the situation in terms of store payback.

Turning to your second question about mix, as Paul mentioned we have been opening larger stores recently. And as I indicated in terms of furniture one of the benefits of larger stores is that you can actually get the non-grocery out on display to much better effect.

So whether that's bedding, whether its furniture, whether it's larger box electricals, you just sell more of it because it's better displayed. And so that has helped offset some of the headwind we've experienced in terms of the weaker pound versus the dollar compared to a year ago.


Warwick Okines, Deutsche Bank Equity Research - Analyst [3]


Warwick Okines from Deutsche Bank. Two questions, one on like-for-likes and one on new store expansion.

On LFLs, I take your comments about cannibalization and the negative maturity curve, but you have in prior quarters said that 2% to 3% was a reasonable expectation for the year. Were you talking at that time pre-cannibalization or is this something around -- or are there some effects around the distribution center in Q2? And in particular could you just maybe talk about the disruption feeding into Q3?

The second question, sorry if I may, just on this is probably one for Paul, on the new stores you are opening are you still happy with the GBP4.6 million revenue per store sort of rough guidance you gave us earlier in the year? And are you still opening space at around GBP11 per square foot? Thank you.


Paul McDonald, B&M European Value Retail SA - CFO [4]


Thank you, Warwick. So in terms of like for like I think the most important thing to say in terms of the current quarter is, of course, the next six weeks are a lot more important than the last six weeks. And so it would be entirely foolhardy of me to try and predict what the quarter is going to be.

What I can say is the first six weeks have been challenging, but that's largely down to the weather. Frankly, for those first weeks, six weeks of this current quarter you do want to be selling cold-weather product, and that's just not been moving as yet.

And the question is as yet unanswered doesn't to whether that just catches up at some point during the half when the cold snap eventually comes, whenever that might be. It might be before Christmas, it might be after, we just don't know.


Simon Arora, B&M European Value Retail SA - CEO [5]


I think the reason why we have flagged this question of cannibalization is we shouldn't forget the context or the fact that this business has opened 84 stores in 12 months. We have never done that before.

And we think it's absolutely the right thing to do because we have this purple patch, this unique situation where we have never had it so good in terms of the quality of retail spaces being offered to us. And if there is some short-term pain to like-for-likes as one metric, so be it.

Because, yes, in an ideal world if you have got two stores in a town in order to keep everybody happy you'd open them both up in the same year. So you have no impact on like-for-like, but the world doesn't work that way.

And actually whatever the impact of cannibalization on the existing store, we are still delighted that we have both those stores because actually in that scenario typically you are serving two different shop missions. You have got a town center store that is pedestrian led, smaller store 8,000 to 10,000 square foot of sales, but then you have on the ring road of that town or out of town on a retail park or on one of the main A roads you've got a larger store with a garden center and parking that's more of a destination store.

They are serving different customer needs, different shopper missions and, yes, in the year that you open the second store there is some impact inevitably on footfall at the previous store. But give it a year and actually it corrects itself because both stores are then an opportunity to go back into growth. So we give you some figures on it just because we want you to understand what's behind our headline number.

But I come back to my earlier point, it's all to play for the next six weeks. What I would say to going back to your question of DC disruption, that's more around the cost base because certainly if you go to our stores today they are full, the products there.

Sorry, you had a question on --


Paul McDonald, B&M European Value Retail SA - CFO [6]


Yes, just a couple of points. I think GBP4.6 million is still a good number to use, Warwick. In terms of the caliber of rent per square foot, I mean ultimately we are about [counter] in terms of store returns ultimately. You always end up with a range of square footages provided you ultimately get the right cash returns which you can see from the actual new store. In terms of new store returns we're my probably a little bit ambivalent providing they hit our overall investment criteria.


Andrew Porch, HSBC - Analyst [7]


Yes, good morning sir. [Andrew Porch] from HSBC. There's a few from me.

You've seen your EBITDA margin fall 55 basis points in the half. I was just thinking I appreciate there is a lot of investment in there, but as you begin to leverage that investment would you expect that 55 basis points to substantially reverse over time?

Second one, often when we see retailers buying stores of other retailers you are normally buying the bad stores. What gives you confidence that you can operate the stores economically? Is it that you are paying lower rents, are your cost structures lower, are you expecting better traffic?

And then lastly on the German DC, can you just tell us what the capacity of that will be in terms of store numbers, how many stores can it support?


Simon Arora, B&M European Value Retail SA - CEO [8]


Certainly, just to rattle through those. So in terms of the leverage of that additional center overhead you are absolutely right that should happen, because as we mentioned, before any one of those two depots ships a single carton into a store you've got a good two months of premises cost, property cost and indeed people cost that is entirely unproductive in terms of changing your bottom -- your turnover. So yes, that will unwind itself over the next year or two.

Coming on to new stores what makes us think that we can trade those stores where the previous incumbent traditional retailer wanted to exit? It's simply because, you know what, quite often we have not got a store in that town whereas they might already have a store that they have moved to or want to move to or their business model is changing because they might, for example, be migrating to an online model as opposed to a bricks-and-mortar.

And to give you absolute confidence in terms of our ability to trade that new space attractively just go to the slide where we showed you, well, look here is some really good data on 67 openings where there is no noise. It's the full data set of a two-year opening program.

Moving on to the German business, to answer your question directly it would allow the business to grow by about 50%.


Simon Irwin, Credit Suisse - Analyst [9]


Hi, it's Simon Irwin at Credit Suisse. A few questions for you.

Firstly, can you just give us a little bit more flavor about the UK openings in terms of size and location? It looks as though this year's stores are very much oriented towards those out-of-town stores that you talked about. Should we expect that to continue in the long term or do you think we will go back to a more balanced view of in and out?

Secondly, can you just talk a little bit more about product trends going into peak, particularly how does the what's the outlook for particularly things like toys? Going into Christmas it looks as though product trends there are a bit weak.

And then can you just talk a little bit about the store growth and how that relates to the DCs? It looks as though a lot of the infill this year has been in the Midlands. And I was just wondering why all of your new DCs are still in the Northwest.


Simon Arora, B&M European Value Retail SA - CEO [10]


So it is the case that there has been a bias towards out-of-town over the last 12 months. That's been a function as much of anything else of the sort of sites that have been offered to us.

However, we remain agnostic, genuinely agnostic as to whether we are in town or out-of-town. Both types of stores offer extremely attractive returns. And so there is no deliberate strategy to favor one over the other.

Moving on to product trends, what I would say to you is that the core Christmas product range if you ask our store managers is the best we've ever had. And if you look at early reads of core Christmas decorations we are very with happy with how that is selling.

You are right, some categories, for example toys this time last year they had the advantage of, for example, Frozen the movie being new and extremely attractive. Literally shoppers were queuing out the door to get hold of the product.

And so whilst that product remains a high rate of sale it is not quite as strong as this time last year. But that's just the toy market. You have ups and downs to a large extent dependent on Hollywood and what Hollywood brings out.

Turning to your question on store growth, you have to remind me what the question was. I've forgotten what it was.


Simon Irwin, Credit Suisse - Analyst [11]


(Inaudible) and your DCs are all going in the Northwest.


Simon Arora, B&M European Value Retail SA - CEO [12]


Yes, that was just a function of what is available in terms of built and ready to move into. You will know if you think back over the last 12 months, 18 months, some of this 84 store openings in the last 12 months was not budgeted. If you go back to our IPO we were talking about 40 stores year.

And so we have needed to put that capacity on quickly. And it just so happens that in the Northwest that was the most practical thing to do.

We do remain on the search for a depot in the South. But actually in some ways taking on this additional space here in the Northwest has taken some of that time pressure off. But certainly within the sort of three-year time period we would like to identify a depot in the South in order to reduce the number of miles that we are traveling in terms of logistics.


Simon Irwin, Credit Suisse - Analyst [13]


(inaudible - microphone inaccessible)


Simon Arora, B&M European Value Retail SA - CEO [14]


It such at the margin, it is not material number. When we look at a new store we are just as happy to be opening on the south coast as we are in the Scottish Highlands. It makes no difference to us because our transport costs are such a small percentage of the revenues.


Fraser Ramzan, Nomura - Analyst [15]


Good morning, Fraser Ramzan at Nomura. You may have addressed this before, but could you talk a little about the living wage and how you intend to manage that through your cost base in the coming year and particularly in the context of a very modest like-for-like you are currently seeing?


Paul McDonald, B&M European Value Retail SA - CFO [16]


Yes, probably a few points. I mean we spoke about (inaudible) on our last call actually, but certainly probably around about approximately, I put it in the industry overall I think you have got the fact there are actually, I mean this is kind of the headwind for the whole retail industry. In many ways B&M is better placed in terms of our EBITDA margins and our relatively lower cost of sale in terms of our store wages.

We have approximately 50% of our colleagues in the living wage would apply to. I think we previously guided last year that in terms of next year it's probably a GBP3 billion to GBP4 million headwind assuming we don't do anything to mitigate that which is probably 15 basis points of our EBITDA margin.

So very much we're clearly as the business over the last few years if you look at our store wages as a percentage of sales the national minimum wage has increased 2% per year. And we have actually managed to buy various other efficiency improvements actually mitigate that.

So as a business we wouldn't be doing, we would be sort of at good management if we went looking to do take action to actually mitigate that. So it's constantly in our thought, and we will be looking to mitigate part of it.


Claire Huff, RBC Capital Markets - Analyst [17]


Hi, it's Claire Huff from RBC. Two quick ones please.

The first one just around seasonal and the cold weather products, just what proportion of the mix that is going into peak please? And then the second one, I appreciate that you've commented on the costs of some of the disruption with the new warehouses, but just if you could give a bit more color around some of the issues you have encountered about product availability and whether that will be fully sorted by peak and whether you can give some numbers around the availability that would be helpful.


Simon Arora, B&M European Value Retail SA - CEO [18]


Sure. We don't actually break out individual product categories for commercial reasons. But broadly speaking, over 50% of what we sell is general merchandise and, yes, beginning of autumn you want to be selling more cold weather product because that's what's new.

In terms of the stock availability at stores, the stores are fully stocked. So what we were referring to were the early commissioning challenges in literally the first four to six weeks of a depot going live where distribution colleagues are learning the job. But in terms of getting product to stores today, it's all flowing absolutely on time and stores are well prepared for the coming trade.

I think one of the things I would ask you all to reflect upon is within the outlook we've deliberately said we are confident for the full year, let's not lose sight of the fact that as a management team we are in a good place. We have high growth targets both in terms of revenue and profitability and we remain confident of hitting those targets.

So yes, there might be some noise around the makeup of how we get there whether it's new stores, whether it's like-for-like, whether it's overheads in the distribution center. But actually big picture things are going really well.


Rob Joyce, Goldman Sachs - Analyst [19]


Hi, it's Rob Joyce, Goldman Sachs.

Three quick ones for me. Just on the grocery pricing, can you say where you see your advantage versus the traditional grocers?

Second one was just on the purpose built locations for next year. Can you tell us which retailers are located around you in those locations?

And then finally, one for Paul, just can you give us any feel for working capital for the year where you think that turns out? Thanks very much.


Simon Arora, B&M European Value Retail SA - CEO [20]


Yes, so it's important to understand, when you think about our food offer we are not in the core grocery market around fruit and veg, meat and fish, frozen, chilled, we are just not in that space. So the core battleground between the hardline discounters from Continental Europe, the big four compete against each other, actually that's not entirely relevant to us.

For our town center estate, it's as much as anything else a convenience proposition. You've run out of toothpaste that morning, pop into the B&M as you are walking down the High Street, we've got them.

At the core of our offer is everyday low pricing rather than high low. So that's something that the consumer is very receptive to. And so when we think about our grocery offer in the broader sense there's not a lot to report. The market is generally quite stable as we see it.

To answer your second question about purpose built space, where do we like to be collocated, one of the interesting things now is that as the brand is becoming better known, better established and we as a retailer just become bigger in the UK, in some ways now we don't need to be next to anybody in particular. I will give you an example.

This week we will sell 0.5 million Christmas crackers and Christmas is still five, six weeks away. And what that tells you is that we are a destination for certain categories because people know we've got the best prices. So, frankly, for a lot of that purpose built space as long as it's visible, on a main road and is well configured we will trade well.


Paul McDonald, B&M European Value Retail SA - CFO [21]


Just in terms of the working capital point, I mean we previously guided to say roughly at March we would be roughly in about 9% of sales. Rob, I don't think anything has materially changed on that point.


Caroline Gulliver, Jefferies - Analyst [22]


Hi, Caroline Gulliver from Jefferies. A couple of questions on Germany.

You talked about the fact that you are up to 1700 SKUs now. Just wondered if you could talk about what product ranges you've added this year versus last Christmas?

And then, secondly, I believe that the trials at the newest stores are smaller than the existing estate. Just wondering if you could, obviously, you operate a mix of size of stores in the UK, what are you doing differently? What are some of the learnings?

And then my third question was just on leverage. I just wondered if you could update us on how you think about that. Obviously, you are down to 2.2 times net debt to EBITDA. What are some of the parameters you are thinking about going forward?


Simon Arora, B&M European Value Retail SA - CEO [23]


So in terms of the German business what they have on their shelves this year that they didn't have last year is, of course, Christmas decoration and toys. Because we acquired that business probably too late in the year in order to book those orders and get those lines into that estate in time for Christmas. So that's what's new.

In terms of the stores sizes in Germany, just like the UK business we see there being a spread of store size and the way we think about it is actually in terms of store contribution as a percentage of revenues rather than an absolute number. So as long as that percentage is healthy we are again, just like in the UK business, agnostic as to whether it's a 10,000 to 15,000 square foot store or a 20,000 to 25,000 square foot store. In terms of the balance sheet, Paul would you like to take that?


Paul McDonald, B&M European Value Retail SA - CFO [24]


Yes, sure. I mean, I'm not going to say, I think probably the key points, Caroline, obviously, we spoke earlier about the highly cash generative model you have seen previously. Even despite that, the CapEx investments we've had in the first half of this year we continue to generate cash and delever.

It's very much we haven't set ourselves any kind of target as a Board as to what we think is the right level of net debt to EBITDA. It's something that we as a Board we will decide. And clearly if there is surplus cash to return we would look to return it to shareholders if we haven't got any better use of that capital.


Unidentified Analyst [25]


(inaudible), Bank of America Merrill Lynch. Two questions.

First one, can you give us an idea on how comfortable with the inventory position has gone up quite steeply. What are the key drivers behind it and are you comfortable with the current inventory position you have?

And if you can give a little bit of a color what exactly has the average store size increased in the UK by run (technical difficulty) thanks.


Simon Arora, B&M European Value Retail SA - CEO [26]


So the inventory within B&M is actually remarkably stable on a week-to-week basis as measured by a number of weeks stock. The increase that you see on that snapshot as at September 30 is it's really just a timing difference.

It's just, you know what, actually, autumn winter product arrived a little bit early, on time, it's here and there are no supply chain problems. So there's just nothing to worry about. When you look forward to the end of the year entirely confident that it will be consistent with previous years, frankly, just as it has been now for 10 years.

For 10 years on a week-to-week basis it really doesn't fluctuate materially. And that is the virtue or the benefit of a limited SKU model. By having limited SKUs you actually can't have a situation where your inventory goes out of control because it's one in, one out.

And store size, it's really not a deliberate step, it's just a function of the ones we happen to have opened over the last six months are larger. When you take a look over the entirety of the full year it's not materially different to what we've guided to previously. So there will be some smaller ones in the second half. But circa 19,000 is the average size of a B&M store nowadays.

We have a literally one or two minutes left.


Adam Cochrane, UBS - Analyst [27]


It's Adam Cochrane at UBS. In terms of the better property environment, are you finding that your competitors are trying to gain the sort of the same advantage in terms of their space?

Do you have quite intense negotiations when a space becomes available with some of your competitors? Or is this something where your covenant is much stronger at the moment that you are their preferred choice?


Simon Arora, B&M European Value Retail SA - CEO [28]


It's a good question. Actually there are two dynamics.

First of all, if you think back to that Venn diagram that sets out the UK market there aren't that many people looking to put down more space. So it's quite often a one horse race as to whether a deal can be struck. But you are right to comment upon the fact that one of the side effects or one of the benefits of being listed is that your covenant suddenly is regarded so much more highly by the landlord universe.

So, yes, if we are competing against an independent or a weaker privately owned business a landlord is always going to prefer us. Indeed they would actually accept a lower rent from us because in terms of their investment value it's more than compensated for.


Matthew Taylor, Numis Securities - Analyst [29]


Matthew Taylor, Merrill Lynch. Just a question on gross margins. In the UK, obviously, you had --


Simon Arora, B&M European Value Retail SA - CEO [30]




Matthew Taylor, Numis Securities - Analyst [31]


Sorry about that. That was a long time ago.

A couple of questions on gross margin. On the UK facing quite a big headwind from last year when you had a very strong sell-through seasonal merchandise.

And, obviously, you had a currency headwind as well. In the first half you came out pretty much even Stevens.

You mentioned mix. Presumably there is volume gains behind that, as well. I was just wondering does that give you comfort going into the second half if there is a bit of a seasonal risk in terms of markdown in the UK on some of the autumn lines you've mentioned?

And just on Germany you mentioned that the currency effect would be reflecting the pricing elsewhere in the market. So do you think that that headwind will unwind through the second half or is it more a factor for next year?


Simon Arora, B&M European Value Retail SA - CEO [32]


So when you think about our core truly seasonal Christmas product we don't foresee any issues. In fact, Christmas has had a perfectly good start. Christmas decorations, for example.

I guess on the other products that I've referred to that had a slow start it actually all depends on just when it gets called. And actually it might be that in this particular quarter you don't have the good sell-through but you have a catch-up in January, February and March if there is snow on the ground or it gets into that colder weather. So just too early to say on that.

Moving on to the German question, all these products that we are talking about whether they are sold by Jawoll or by their competitors they are all made in dollar denominated trading environments. So it, frankly, all comes from Asia. And so we are confident that that increased cost in euro terms has to get passed on by the retail market in Germany because it is a competitive market.

Most retailers there operate on quite fine EBITDA margins. And so, frankly, they have no option other than to pass it on. It's just a question of waiting until that happens, and that will happen by certainly this time next year, December of next year.

Very good. Thank you for those questions.

I thought it was important to finish on time and we will see you next time. Thank you.