Investors are maintaining their belief in Metcash’s recovery story and the strategy of CEO, Ian Morice, especially as there is the hint dividend will resume in a year’s time.
That’s despite first-half underlying net profit falling 4.7% to $82.8 million as losses in convenience retailing and weaker earnings in food and grocery wholesaling offset gains in liquor and the expanded hardware business.
Statutory net profit slid 39% to $74.9 million in the six months ended October 31 from $122 million in the same period of 2015-16, which included earnings from Metcash’s auto businesses, sold last year (and now being well-managed by Burson).
The underlying net profit result was just short of market forecasts around $84 million. Metcash shares rose 4.3% to close at $2.06 yesterday, trimming some of the 9% fall in the past two months.
Supermarket earnings fell $2 million, or 2.2%, to $88.8 million as sales slipped 1% thanks to the intensifying competition with Woolworths, Costco Coles and Aldi.
Convenience stores slipped into the red, reporting a $4.3 million loss from a year-earlier $1.1 million profit as sales dipped 2%.
Hardware earnings rose 7.8% to $12.5 million as sales rose 9.6% to $581.6 million, boosted by one month’s trading from the Home Timber & Hardware business acquired from Woolworths in September.
Liquor earnings rose 4.6% to $27.1 million following stronger sales in the IBA liquor network.
Metcash has invested more than $150 million into cutting grocery prices and helping independent retailers improve their stores to lure shoppers from Woolworths, Coles, Aldi and Costco.
That investment has taken a toll on Metcash’s earnings – food and grocery wholesaling profits fell to $180 million in 2016 from $293 million in 2014 – and profit margins have halved.
"We’ve seen footprint growth from Aldi obviously in South Australia and Western Australia, we’ve seen over $1 billion of price investment from the market leader [Woolworths] and competitor response to that, as well as continued high deflation environment," Mr Morrice told analysts yesterday.
"So against that backdrop and that most intense period, we think that we’ve withstood that quite well, if you look at our supermarket business in particular."
Metcash supplies groceries to IGA, Foodland and FoodWorks supermarkets, Lucky 7 convenience stores and Campbells Wholesale, and alcohol to chains such as Cellarbrations and the Bottle-O.
Metcash’s Price Match program, where prices on key grocery lines are reduced to match those in the major chains, and Project Diamond, a store refurbishment program that boosts sales of fresh food, have helped slow a decline in market share.
The impact of the investments are being partially offset by cost cuts, which are aimed at reducing costs by $100 million by 2018.
Metcash CEO, Chief executive Ian Morrice expects food and grocery earnings to improve in the current half, helped by cost savings and restructuring in the convenience business and a resumption of dividends next financial year was trailed yesterday.
So investors swallowed their doubts and hopped back on board (Metcash shares have fallen 7% since October) and the shares bounced 6% to $2.10.
