Metcash profits decline as supermarket war creates ‘tough market conditions’

Posted by AFN Staff Writers on 25th June 2014
Metcash profits decline as supermarket war creates ‘tough market conditions’
Metcash profits decline as supermarket war creates ‘tough market conditions’

Australian wholesaler and distributor of groceries and hardware products Metcash Limited (Metcash) has announced its results for the 2014 financial year, with an underlying $250.1 million profit, a decrease of 10.9 per cent on the prior year.

For the 12 months to 30 April 2014, Metcash generated $13.4 billion of sales revenue, an increase of 3.2 per cent on the previous year.

Metcash, whose brand portfolio includes IGA, Mitre 10, Cellarbrations and Autobarn, said the results reflected a trading environment that remained difficult. In particular, it said the effects of ongoing deflation (estimated to be 1.4 per cent for grocery), rising utility costs, a highly value-driven consumer and excessive fuel discounting by the two large grocery chains had adversely impacted operating leverage.

Metcash said its Food and Grocery segment was also impacted by the closure of 25 Franklins stores and a reduced ‘teamwork’ score from the converted stores. The tough trading conditions for the Food and Grocery segments were partially offset by growth in the Liquor and Hardware and Automotive segments as well as by incremental growth from acquisitions.

Important ‘transition period’ to develop transformation plan

Ian Morrice, Group CEO of Metcash, said that while the year had been challenging, it had been an important transition period as the company undertook a strategic review and developed a transformation plan to address the structural challenges of the business, particularly in Food and Grocery.

Mr Morrice said evidence of the challenges was apparent in the underperformance of the core Food and Grocery business, which had led to a disappointing outcome for shareholders.

“During the year, Metcash Food & Grocery ‘like for like’ supermarket wholesale sales fell by 2.1 per cent,” Mr Morrice said. “Metcash Food & Grocery earnings before interest, tax and amortisation (EBITA) declined 19.5 per cent from $377.9 million to $304.3 million,” he said.

“Although ongoing price deflation hampered performance in Metcash Food and Grocery, transformation in this business is now well underway and initial results from pilot programs are encouraging,” Mr Morrice said.

In contrast, Mr Morrice said Metcash’s non-food businesses had returned “highly credible results in very tough market conditions”, gaining market share amongst fierce competition. He said good sales growth had played through into “strong EBITA performances”.

“These businesses are also executing their own strategic plans, driving network growth and consolidation within their respective markets,” Mr Morrice said.

Liquor success

Metcash said its Liquor division achieved strong growth in a flat liquor market, with sales growth of 8.3 per cent and EBITA of $53.8 million, an increase of 14.2 per cent.

Australian Food News notes that Metcash’s Liquor division may soon face tougher conditions, with both Coles and Woolworths having recently announced plans to improve their liquor divisions. In May 2014, Australian Food News reported that Woolworths planned to extend its leadership in both the food and liquor categories. Australian Food News reported in May 2014 that Wesfarmers had also announced the Coles group would focus on transforming its liquor business in the coming financial year by tailoring its liquor range and clustering its stores by customer demographics.

Hardware and Automotive division growth

Metcash reported its Hardware and Automotive division grew sales by 23.6 per cent and increased EBITA by 47.8 per cent to $53.5 million.

Mr Morrice said that success in the Liquor and Hardware and Automotive divisions came from “strong consumer focus”.

Supply chain investments

Mr Morrice also provided an update on Metcash’s supply chain.

“Our supply chain projects include the already commissioned ‘single pick’ KNAPP system and the project to fully automate the Huntingwood Distribution Centre known as Project Mustang,” Mr Morrice said.

“This project will provide a more efficient replenishment system, producing denser pallet assembly and reducing packing and transport costs. It represents a $75 million investment that takes Metcash to the leading edge of best practice distribution,” Mr Morrice said.

Metcash reported that Project Mustang was on schedule and is expected to ‘go live’ with liquor distribution in September 2014 with food and grocery following early in 2015. The financial benefits will not be realised until FY2016.

Group overview

During 2014, the Group incurred $54 million of significant items after tax, which it said was mainly due to the strategic review and impairment and acquisition costs incurred. The Franklins corporate stores recorded a retail loss of $10.5 million after tax, down from $59.9 million in 2013. Metcash has now completed the disposal of all 80 Franklins’ corporate stores. The reported net profit for the year was down 17.9 per cent to $169.2m.

Cash generated from operating activities was strong at $388.7 million, up 29.7 per cent on the prior year, assisted by approximately $80 million of timing benefits, expected to unwind in FY2015. These cash flows were applied to funding business activities and returning a fully franked dividend to shareholders. The Board announced a final fully franked dividend of 9.0 cents per share for the last six months, payable on 25 July, taking total dividends to 18.5 cents per share for the full year.

The Board also announced the Dividend Reinvestment Plan (DRP) would be underwritten to 50 per cent. Metcash said this reflected a greater allocation of earnings to internal investment in the business in order to assist funding the transformation program. The DRP will provide investors with the opportunity to reinvest their dividend in additional Metcash shares at a 1 per cent discount.

Future plans

Mr Morrice said solid progress was being made against the strategic priorities laid out at the Strategy Day in March 2014.

“There is a strong momentum building across the Group, the initial results from the transformation program are pleasing and our non-food pillars remain well positioned for growth,” Mr Morrice. ‘We will also continue to drive efficiencies through further infrastructure investment that better aligns our supply chains to the needs of retail customers and suppliers,” he said.

Mr Morrice said that in the 2014 financial year the results of our Liquor and Hardware and Automotive divisions – and the Company’s pilot programs in Food and Grocery – had “proved the power of independents that are ‘tuned in’ to their customers”.

“We know what needs to be done to drive this focus across the Metcash network,” Mr Morrice. ‘In FY2015, we will focus on executing these plans,” he said.

“By investing significantly in the FY2015 year in a reshaped model for Metcash Food and Grocery and driving even stronger growth in our other business pillars, we are building a company that can, once again, deliver strong shareholder returns,” Mr Morrice said.