Metcash profit falls 6.1pc as investment in food prices bite

Sue Mitchell
November 30, 2015
The Age
Metcash shares jumped 11 per cent to an eight-month high as the food, liquor and hardware distributor reported encouraging sales in IGA supermarkets after investing more than $100 million over the last two years to reduce food and grocery prices.
Metcash’s underlying net profit slumped 6.1 per cent to $86.9 million in the October-half as investments into reducing grocery prices and refurbishing stores crunched margins in the food and grocery business, wiping out gains in liquor and hardware distribution.
However, food and grocery sales stabilised, rising 0.7 per cent to $4.54 billion, and same-store sales in IGA stores rose 0.6 per cent as customers responded positively to Metcash’s investment in prices and store refurbishments, a wider range of fresh foods and private label goods.
Australia’s dominant food wholesaler is spending more than $45 million a year to cut food and grocery prices in IGA supermarkets by about 3 per cent to reduce the price gap with Woolworths and Coles and overcome consumer perceptions that IGA prices are uncompetitive.
Food and grocery earnings before interest and tax slumped 22.9 per cent to $91.9 million as margins were squeezed. This followed a 26 per cent fall in food and grocery earnings in 2015.
Chief executive Ian Morrice said Metcash was still experiencing highly competitive trading conditions and price deflation, but there was evidence that the five year transformation plan was starting to deliver positive results.
“Importantly, we have seen a continuing improvement in the sales trend for the food and grocery pillar,” he said.
While supermarket sales were broadly flat, the underlying trend had improved from negative 3.7 per cent in the first half of fiscal 2015 to negative 0.4 per cent in the latest reporting period.
Food and grocery sales would have risen about 1 per cent if not for a hail storm in April which destroyed the roof of Metcash’s main distribution centre at Huntingwood in Sydney, disrupting supplies.
“The transformation plan is certainly achieving some important progress,” said Mr Morrice. “The fact that we have over 900 stores actively participating in Price Match and 1200 stores in the Black and Gold private label program .. that’s incredible support, that’s what’s leading the 350 basis points uplift.”
​Metcash shares, which have fallen 50 per cent over the last 12 months, rose 14.7¢ or 11 per cent to $1.46 in early trade, their highest level since March.
As expected, the fall in food and grocery profits offset gains in liquor and hardware and group earnings before interest and tax fell 12.7 per cent to $133.7 million.
Liquor sales rose 3.5 per cent to $1.54 billion in a flat market and earnings rose 4.0 per cent to $25.9 million, while hardware sales increased 1.2 per cent to $530.7 million and earnings jumped 22.1 per cent to $11.6 million, reflecting supply chain savings and higher contributions from joint ventures.
Convenience sales rose 3.7 per cent to $774 million as stronger sales to petrol stations and convenience stores were partly offset by weaker sales at Campbells stores.
The underlying net profit result exceeded consensus forecasts around $78 million and compared with $92.5 million in the first half of fiscal 2015.
Bottom-line net profit, including earnings from discontinued operations, rose 20 per cent to $122 million from $101.7 million in the year-earlier period.
Interest costs fell 47 per cent after Metcash used the $275 million proceeds from the sale in June of its Autopro, Autobarn and Midas auto businesses to Burson Group to reduce debt.
Analysts expect full-year net profit to fall for the fourth consecutive year, to about $157 million, compared with an underlying net profit of $193 million in 2015.
Metcash is preserving cash by withholding its dividend for 18 months.