While Metcash returned to profit in the year to April 30 with analysts and other commentators saying its store revamp and price matching strategies were the keys to the revival, the real story can be found in the way the company cut costs and debt.
The company’s turnaround saw management maintain the promise to shareholders that dividends would resume (if affordable) in the 2016-17 year (the second half, or in a year’s time).
But after a 31% rise in the price of the shares this year, they slumped sharply in the wake of the results released yesterday, plunging more than 12% to $1.85. What investors did like was the frank admission from the company that its core supermarket business would continue to face challenges in the coming year.
"Highly competitive trading conditions continue in all our markets, with the additional impact from increased Food & Grocery competition in both the South Australian and Western Australian markets. "The Food & Grocery business continues to face headwinds from competition, deflation and a rising cost base,” Metcash said in its outlook comments for 2016-17.
Investors ignored what was the most positive parts of the results – the very large cut in debt which had threatened to strangle the company in 2015. “The strong focus on capital and cash management has delivered a significant reduction in debt which positions the Group well to deliver its Transformation Initiatives as well as invest in growth opportunities.
"This financial strength also underpins the Group’s intention to recommence half yearly dividend payments with effect from the FY17 final dividend, subject to capital requirements,” CEO Ian Morrice said in yesterday’s statement.
Metcash reported a $216.5 million annual net profit, bouncing back from a $384.2 million loss 12 months ago (which was hit by $640 million of impairments and cost cuts). Underlying profit after tax was up by $4.7 million to $178.3 million. The company said the improvement ”reflects lower finance costs”, which it did, judging by the multi-million dollar halving in net finance costs over the year..
Metcash, which supplies independent supermarket chains such as IGA, Foodland and Foodworks, has been matching the prices of Coles and Woolworths on a range of basket of goods as Aldi expands into South Australia and Western Australia.
The group, which also supplies hotels liquor and owns hardware chain Mitre 10, reported a 1.3% rise sales to $13.54 billion in the year to April 30. "Key supermarkets initiatives are delivering returns and the liquor and hardware businesses continue to build momentum," Mr Morrice said in the statement to the ASX on Monday.
Mr Morrice also said a focus on debt reduction and cash management was positioning Metcash to invest in transformation and growth initiatives. The company sold its automotive business for $285.4 million last year to help pay down debt and cover restructuring costs. The accounts show that net debt was slashed from $667 million at the end of 2014-15 to $275 million at April 30.
That saw the net financing costs more than halve to $27 million for the year from just over $55 million. The company has been using this and other savings to reinvest in the price matching campaign and the revamp of key stores.
