Grocery Weakness Undermines Hardware Strength At Metcash

Shares in grocery and hardware wholesaler Metcash were sold off in yesterday’s big surge after it produced a less than impressive set of half-year figures and a weak outlook.

The shares fell nearly 7% at one stage after the company reported a 3% rise in earnings thanks to growth from its network of Mitre 10 and Home Timber & Hardware chains. The shares later ended the day off 5% at $2.63.

That was after Metcash reported a statutory profit of $95.8 million for the six months to October 31, up from $93 million in the same half last year.

The interim dividend was lifted to 6.5 cents a share from 6 cents.

Metcash said its grocery business, which supplies IGA and other independent supermarkets, faced “challenging market conditions”, with total sales broadly flat from last year at $3.6 billion

Sales at IGA stores fell 0.2% on a like-for-like basis, an improvement from a 1.1% decline in the same period last year.

In hardware, total sales were up 1.3% while earnings grew by $9.6 million to $37.8 million as it reaped benefits from merging Home Timber & Hardware into its existing hardware Mitre 10 network, after buying it from Woolworths in that retailers 2016 clean out.

The result was made a little confusing by Metcash moving to a new accounting standard, AASB15, covering Revenue from Contracts with Customers. the 2017-18 half year was restated to allow an accurate comparison. Metcash said though that without this new standard profit would have risen 3.9%.

Group CEO, Jeff Adams said in the statement: “The first half results were pleasing in the face of challenging market conditions, with the Group delivering improved sales and earnings.”

“It was pleasing to see all Pillars contribute to the improved results, with additional synergies from the HTH acquisition being a key driver of increased earnings in the Hardware Pillar.

“Our Supermarkets Pillar continued to face challenging market conditions, however, it was encouraging to see a slowdown in the rate of deflation which helped deliver an improvement in the sales trajectory for both ourselves and our retailer network.

“We were excited to recently announce that we have entered into a long-term lease for a new purpose-built distribution center in South Australia. The new DC is expected to improve the competitiveness of our South Australian retailers through the delivery of efficiency benefits and access to a greater range of products.

“Importantly, it reflects our on-going commitment to championing independent retailers and further strengthens the foundation for continued investment in the network.

“As previously announced, we now have long-term supply agreements in place with the majority of our Foodland retailers in South Australia.

“We are in the final period of our very successful Working Smarter program and will commence implementing the next phase of our strategy focused on ensuring we have a sustainable cost base and revenue growth.

“We continue to have a strong financial position and are well placed with flexibility to pursue future growth opportunities,” Mr. Adams said.

In an Outlook comment Metcash said “highly competitive market conditions are expected to continue through the balance of FY19” in food.

“We are, however, encouraged by the slowdown in the rate of decline in non-tobacco sales and progress on key initiatives in the first half. We expect 2H19 EBIT to be impacted by ~$8m of incremental investment by the Supermarkets business in growth opportunities. This investment is expected to deliver earnings benefits beyond FY19. Working Smarter savings are expected to help mitigate the impact of difficult market conditions and cost inflation.

“In Hardware, we expect some further softening in new construction and DIY activity over the balance of FY19, but to levels that are still above historical averages. We expect full synergy benefits from the acquisition of HTH to be realised by the end of FY19,” the company said.

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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