Sneaky, sneaky Metcash (MTS) – no wonder its shares were battered this morning after pushing out a profit downgrade on Thursday evening, and then the long awaited business revamp this morning.
The company’s shares plunged 10% to $2.83 – the lowest they have been for more than a decade, as shareholders absorbed the flood of news about the downgrade, and then the cost of the revamp and how shareolder returns will be cut to help pay for it.
Profits for 2013-14, already under pressure, will be lower and the dividend will be cut for several years to help pay the cost of a huge capital spending program that could cost $700 million over the next five years.
The changes will see a gradual transformation of the company’s IGA chain of small to medium supermarkets.
In the guidance on Thursday evening, the company said the transformation had already started and had started impacting earnings.
"Aspects of this plan are being implemented and have begun to impact current year’s earnings. The company’s January and February results were also below management’s forecasts. Management now expects a decline in underlying EPS in the range of 13-15% (which includes approximately 3% of equity issuance dilution) for FY14," the company said.
This morning the company said that the revamp would see up to $700 million spent by the company over the next five years.
To help pay for this Metcash will reduce its dividend payout to 60% of earnings help fund the extra capital investment, and the dividend reinvestment program will be maintained.
Metcash CEO, Ian Morrice said changes being made under a strategic review (called Project Diamond!) in the food and grocery business had hit income. The changes included reducing inventory, restructuring the company’s ‘Black and Yellow’ private label offer and cutting prices on many products.
The project was expected to result in an impairment of $30 million to $35 million on retail and other assets. and the fast-tracking of rationalisation at Metcash Automotive’s warehouse operations since last year’s $84 million purchase of Australian Truck and Auto Parts Group would also hit the bottom line.
Mr Morrice said in the statement issue don Friday that the new strategy would underpin long-term sustainable growth for Metcash and its customers by growing sales and improving efficiency.
He said Metcash can no longer rely on cost-cutting to boost margins and profits and plans to reignite sales growth in the food and grocery channel through what he called six growth levers.
Mr Morrice, who became CEO last June from long-serving chief Andrew Reitzer, said the plan revolved around transforming Metcash’s food and grocery business, driving consolidation and sustainable network growth, making supply chains more efficient, and enabling independent retailers to better compete with their major rivals.
“The consolidation and sustainable network growth initiative will see Metcash focus on converting more independent retailers to our liquor, hardware and automotive banners; extend our retail footprint; reinvigorate our retail execution and enhance the category growth opportunities.
“Metcash is already well known for its logistics capabilities – but our benchmark is world best practice. We will drive efficiencies through further infrastructure investment; continue to invest in technology; increase flexibility to better serve customer needs and reduce our cost of service.
“The final initiative in the transformation plan is providing better support to independent retailers. We plan to do this by expanding our digital platform by introducing competitive omni-channel solutions locally tailored for retailers and providing enhanced analytics and insights capabilities."
Metcash said it would make significant investment over the next three years.
The company said in today’s statement "Total capex is estimated to peak at between $150m and $180m in 2015, reducing to $130m-$150m in 2016 and 2017. The costs of the transformation plan are as follows:
"MFG (Metcash Food and Grocery) transformation: $100m – $125m predominantly to fund store refurbishments, new stores and store buybacks; Supply Chain: $160m – $180m – DC Automation; Digital: $15m-$20m; and Other discretionary capex: $85-$130m – allocated for bolt on opportunities and network growth.
"In order to fund the initiatives in the transformation plan Metcash will target further working capital improvements of $30-$40m over FY15 and FY16; reduce the Dividend Payout Ratio to 60% commencing from final FY14 dividend; and continue to offer its dividend reinvestment plan (DRP) to shareholders," the company said in today’s statement.
