Metcash shares crash after downgrade

Sue Mitchell
March 21, 2014
The Age

Metcash will reduce its dividend payout to fund almost $700 million of capital investment over the next five years as it embarks on a transformation plan aimed at securing the future of the grocery wholesaler and independent retailers in the face of increased competition from Coles and Woolworths.
Releasing long-awaited details of the plan on Friday, chief executive Ian Morrice said the strategy would underpin long-term sustainable growth for Metcash and its customers by growing sales and improving efficiency.
Investors wasted little time in dumping the stock in early trade, with the shares off a quick 12.6 per cent at $2.79 with more than 3.75 million shares done in the opening few minutes.
Mr Morrice says 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 six growth levers.
Mr Morrice, who took the helm 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.
Analysts believe the plan could lead to a significant rebase in earnings.
On Thursday night, Metcash cut its 2014 profit guidance, saying that aspects of the new strategy – including cutting grocery prices to better compete against the major chains – were already being implemented and had started to have an impact on earnings this year.
Earnings per share in the year ending April were expected to fall per cent 13 per cent to 15 per cent, compared with previous guidance for a “high-single digit” decline in underlying earnings per share.
Strategy weighs on margins
Metcash has, for example, cut prices on 2500 products at 34 pilot stores and is monitoring the impact on sales growth. It has also been culling inventories.
“The implementation of Metcash’s new strategy is weighing on margins as the company invests in price across its price match pilot,’ Citigroup analyst Craig Woolford said after the profit downgrade.
“The reduction in inventory is impacting volumes and retailers are temporarily sourcing direct to make up the shortfall.”
Mr Morris also flagged significant one-off costs and asset writedowns, which will further drag down bottom line results. Metcash has reviewed the carrying value of certain retail and property assets and expects impairment charges between $30 million and $35 million before tax.
Metcash said the plan would involve a significant step-up in capital investment over the next five years funded by a reduction in working capital and a reduction in the dividend payout ratio.
Total capex is estimated to reach $575 million to $675 million over five years, causing an increase in gearing. Capex will peak at between $150 million and $180 million in 2015, reducing to $130 million to $150 million in 2016 and 2017.
Investments include:
â–  $100 million to $125 million to fund store refurbishments, new stores and store buybacks, ;
â–  $160 million to $180 million to fund distribution centre automation;
â–  $15 million to $20 million on digital technology,
â–  and $85 million to $130 million on bolt-on opportunities and network growth.
Metcash plans to reduce working capital by $30 million to $40 million in 2015 and 2016 and reduce the dividend payout ratio to 60 per cent , starting with the final dividend this year.
Change for independent retailers
Metcash plans to convert more independent retailers to its liquor, hardware and automotive banners; extend its retail footprint; reinvigorate retail execution and enhance category growth opportunities.
“Metcash is already well known for its logistics capabilities – but our benchmark is world best practice,” said Mr Morrice.
“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,” he said.
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,” he said.
Metcash will also set up a retail academy, to attract and train new retailers to the independent network, develop existing retailers’ skills and provide more value-adding services to members
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