EU CONSUMER STAPLES: B&M: 1H (to Sept) Results (x2)
(BMELN; Ba1/BB+ Neg) (stock -8%)
The continued LFL sales decline is not great to see. Four months into his tenure, the new CEO has laid out a turnaround plan focused on slightly lowering prices to move back below competitors, cutting the SKU range, and improving availability of key items in store. Management insists that lower pricing will not dent group gross margins (last year 37%+ vs. pre-Covid <34%), attributing the structural lift to a higher General Merchandise mix and noting price investments will focus on FMCG — where the LFL weakness sits.
Still, FY EBITDA guidance (which management is implying will be the trough for margins) implies a marked margin reset: UK EBITDA margin target now ~10% vs. historical 12-13%. We see risk for an S&P downgrade if LFLs continue to fall (even if leverage is in its control - and not high). The £curve continues to trade wide; 31s +30 over Burberry, +90 over Tesco, swaps into Euro on the VFC (Ba3/BB) curve and wide of Fnac (NR/BB+/BB+). The mid Nov update will be a mover.
- 2Q UK LFL sales turned to -1.1% leaving 1H +0.1%. Net of 9 store openings it was +3.5% y/y
- General Merch grew, FMCG fell (~half/half split)
- Smaller France presence was +5.2% LFL over 1H and net of 5 store openings +13.4%. Heron foods was net -0.9% with 1 store opening.
- Net 1H group revenue was £2.75b, +4% y/y
- Gross margin improved in 2Q vs. 1Q, but still looks to be down over the half
- adj. EBITDA (pre IFRS 16, i.e. including lease expenses) expected to be £198m, -28% y/y
- its blaming 1/3 of it NI Tax increase in UK, rest on UK LFL sales fall and gross margin weakness
- its pre-IFRS leverage is expected to come in "slightly above" target 1.0-1.5x range
- cash flows are seasonal into 2H - equity pay-outs will be sized based on 2H performance
- company net 1.5x = ~3.0x at Moody's and S&P
Outlook:
- UK LFL sales & gross margins were "gradually improving" towards end of 2Q/Sept
- FY (to March) EBITDA (incl. lease expenses) to be £510-560m (-10 to -18% y/y)
- range reflects uncertainty on 2H UK LFL growth ranging between LSD neg. to LSD pos.
- implies 2H EBITDA -10% to +5% y/y
- It will likely update the FY guidance (if needed) when it reports full 1H results on 13 Nov.
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LOOK AHEAD: US Macro: PPI (Wed) and CPI (Thu) Inflation
US PPI inflation is released on Wednesday before CPI inflation on Thursday, an unusual ordering that should see core PCE implications dialled in after the CPI release rather than the usual wide range waiting for specific PPI details. PPI will be watched more closely than usual this month after a far stronger than expected jump in last month’s July report fired a warning short over tariff-based cost pressures starting to feed through. That included a 0.6% M/M increase in our preferred core series of PPI ex food, energy & trade services, which strips out items such as the then booming portfolio management & investment advice category following the strength in equity markets. It's too early to gauge an accurate sense of analyst expectations for August.
CPI inflation on Thursday will then be the last major release ahead of the Sep 17 FOMC decision. Consensus looks for core CPI at 0.3% M/M after the 0.32% M/M in July, another monthly increase comfortably above a pace consistent with 2% inflation. August should in theory start to see the largest tariff impacts along with September and possibly October. Returning to July’s report, core goods inflation was softer than expected, at a still solid (by core goods standards) 0.2% M/M for a second month running but about half that of 0.4% expected by analysts. Instead, non-housing core services surprised higher. The latter was a “dangerous” development in the words of a usually dovish Chicago Fed’s Goolsbee (’25 voter), who speaking after Friday’s payrolls report is still undecided on a September cut whilst looking for August inflation data “to get more information”.
LOOK AHEAD: US Macro: Payrolls Preliminary Benchmark Revisions (Tue)
- The BLS on Tuesday will publish preliminary estimates of benchmark revisions, based off QCEW data for Q1.
- These will give an indication of the actual benchmark revisions on the Mar 2025 level of payrolls due with the Jan 2026 payrolls report released in early February.
- Bear in mind that the final benchmark estimate tends to nearly always be more negative than the preliminary figure – see historical values to the right.
- That doesn’t mean they can’t be large again after last year’s historically negative revision that lowered the level of payrolls by ~600k. Initial estimates we’ve seen look for another large downward revision, with the smallest being worth -550k but with wide ranges higher.
FED: Barclays Adds A Cut To 2025 Fed View
Barclays analysts now expect three Fed cuts in the remainder of the year, adding October to their pre-existing call for 25bp reductions in September and December. "Given the disappointing August employment report, we expect the FOMC to see more elevated downside risks to the employment side of the mandate."
- As for a 50bp September cut, "we think that the FOMC will view [that] as sending too strong a signal that labor market conditions are deteriorating. Indeed, we think that participants such as Powell understand that the slower pace of payroll employment reflects at least, in part, slower labor supply, which does not translate into increased labor market slack."
- For 2026 they continue to expect 25bp cuts in March and June to 3.00-3.25%, but "we do not think the FOMC will be able to cut rates more than twice next year, as we think that activity will show some slight acceleration, with the economy adapting to the new tariff environment and fiscal policy providing some support, and the unemployment rate will revert down amid limited increase in labor supply."
