B&M well positioned for tough economic times, and barriers in the way of Greggs’ recovery

“Yesterday’s impressive rally has failed to extend into Tuesday’s session with stocks flashing red almost across the board as the number of Covid-19 deaths surpassed 1 million worldwide,” says Russ Mould, Investment Director at AJ Bell.

“The FTSE 100 slipped 0.4% to 5,904 while markets elsewhere in Europe were also weak. Asia was mixed with losses in Hong Kong and small gains in Japan.

“All eyes are on the US Presidential debate later today where Trump and Biden are expected to clash over tax and environmental policies as well as how to protect jobs during the pandemic. Biden is currently leading the polls but his victory is widely considered to be negative for stock markets due to his desire to raise taxes. However, a Trump defeat could also bring relief to a lot of people which in turn could improve investor sentiment.

“On the UK market, utilities was the only sector in positive territory among the blue chip stocks. Financials and real estate were the best performers, while International Consolidated Airlines slumped again as investors worried about how the leisure sector would cope with further coronavirus-related setbacks.”

B&M European Value Retail

“The latest update from B&M European Value Retail confirms it is well-positioned for tougher economic times. When people are feeling the pinch they tend to trade down from more expensive shops and products to the sort of value proposition that B&M offers.

“Geographically too, the business is in a good spot – it doesn’t have lots of big destination city centre stores that would have been heavily impacted by a working from home inspired drop in footfall. Instead it occupies sites in smaller shopping centres and retail parks as well as local high streets.

“And any reduction in footfall has been more than made up for by people cramming more into their baskets.

“Even with these factors in its favour, to be raising earnings guidance in the current environment is quite the coup and underpins its decision to start rolling out new stores more aggressively. It appears its French arm is ticking along quite nicely too.

“If B&M continues to have a relatively good crisis then questions may turn to where it goes next. Amid an apparent takeover of Asda, very much the stepchild of US grocer Walmart’s portfolio, there has been some speculation that B&M might be a good merger candidate for Asda in the medium term.

“Given both operate towards the discount end of the market there could be logic to such a tie-up, particularly given Asda doesn’t currently have any real local, convenience store presence and B&M has just such an offering with its Heron Foods arm.”

Greggs

“Some progress in Greggs’ trading statement will have caught many people by surprise, given its shares were trading at two-year low prior to the announcement implying low market expectations.

“Reliant on commuters picking up a coffee and a bacon roll on their way to work, others popping in for a drink and a snack during their high street shopping trip, and a wide variety of people queuing up for their lunch, the assumption was that Greggs’ normal sales patterns would have been severely disrupted by the pandemic.

“Yet achieving more than three quarters of last year’s sales this September gives hope that the sausage roll king can get back on top. That still depends on whether the UK can get Covid-19 under control. A shift back into national lockdown would be catastrophic for Greggs’ recovery efforts, even though it now has delivery capability.

“Greggs has taken the decision to press ahead and try get its operations back to normal. New store opening plans have been revived and some existing stores are now allowing customers to eat in. Cake fans will rejoice at the news that the Belgian bun is being reintroduced alongside other items which have been absent while Greggs survived on a limited menu during the peak of the crisis.

“These actions could put Greggs in a stronger position assuming the coronavirus situation doesn’t worsen. If it does, the retailer will have to quickly revert to its skeleton operations. The bad news for staff is that Greggs is looking at reducing costs by having reduced working hours in shops.

“There remains the risk that recent positive trading momentum cannot be sustained. With the weather turning cold and rainy and unemployment expected to rise, conditions are not favourable for consumer wanting to go out and shop. Local lockdowns also place barriers in the way of Greggs’ recovery efforts.”

These articles are for information purposes only and are not a personal recommendation or advice.