Profit downgrade for grocery wholesaler Metcash

John Dagge
December 01, 2012
Herald Sun

THE “third force” in Australia’s grocery industry has cut its profit forecast as the price war between supermarkets titans Coles and Woolworths continues to erode its margins.

Metcash, which supplies Independent Grocers of Australia stores, yesterday suffered its biggest one-day slide on the share market in five months issuing the warning.

Unveiling the first-half results, Metcash chief Andrew Reitzer said the rate of price deflation had eased, and three years ago they were falling about 3 per cent annually.

But they were still sliding about 1.4 per cent a year.

Metcash’s food and grocery business lost 0.2 per cent of market share in the six months to October – a result Mr Reitzer described as encouraging given the challenging conditions.

Metcash now expects full-year earnings per share to fall by 2 per cent to 6 per cent – double the previous estimate of a 1 per cent to 3 per cent decline.

The IGA supplier’s shares fell 2.3 per cent in the wake of the announcement.

Analysts say Metcash, which also owns the Mitre 10, Autobarn and Autopro chains, is struggling as it pockets proportionally less from its key food and grocery division.

Overall food and grocery sales increased 0.4 per cent to $4.6 billion, but earnings before interest, tax and amortisation fell more than 5 per cent to $175 million.

Margins in the division – which accounts for more than 80 per cent of the company’s pre-tax profit – have been in decline since Coles and Woolworths launched aggressive pricing and buyer loyalty campaigns three years ago.

They again fell in the six months to October, falling to 3.84 per cent from 4.08 per cent in the same period a year earlier.

Net profit for the six months to October came in at $82 million, down 13 per cent from $94.4 million for the same period a year earlier.

The group’s earnings per share were down 4.6 per cent in the first half on an underlying basis, which strips out the impact of “one-offs”.

Earnings were hurt also by the long-delayed Federal Court approval for last year’s $215 million acquisition of discount supermarket chain Franklins, Metcash said.

The number of Franklins stores that had to be closed was higher than expected as the viability of “marginal” stores – those struggling to make a profit – deteriorated during the delay.

Metcash said 27 stores would be closed or were likely to be closed. Fifty-eight had been sold to independent grocers and handed over or were expected to be sold.

Five are still under review.

The company’s share price closed 8c lower at $3.43.