Profit warning puts the skids under Metcash
Shares in Metcash dived nearly 6 per cent on the earnings warning from new boss Ian Morrice who was fronting his first AGM since replacing company veteran Andrew Reitzer.
Mr Morrice provided a pessimistic view of the retail landscape, characterised by low consumer confidence, but also blamed the profit slide on the intensification of petrol discount schemes offered by his biggest rivals, Woolworths and Coles, which he said had gone "off the scale" during the first quarter of 2013-14.
"It's tough across the board ... quite frankly all those things are factors ... but the escalation of fuel dockets in this last quarter was off the scale to what has happened in the past and that has had an impact on volumes," he said.
Independent retailers including Metcash have squealed about the use of petrol discounts by Woolworths and Coles, especially as the discounts offered at the pump hit as much as 45¢ a litre recently. They have labelled the schemes anti-competitive, arguing independent supermarkets were locked out of the promotion as they lacked a fuel arm like the supermarket giants.
But thrifty-minded consumers were also dragging down Metcash's earnings and management expected the poor trading conditions for its flagship food and grocery wholesale arm to remain for the remainder of fiscal 2014.
Mr Morrice said given the bearish retail environment, Metcash expected underlying earnings per share to decrease in the high-single-digit range.
This would mean its earnings per share could fall as much as 9 per cent, and was against expectations among analysts of EPS growth of about 2 per cent.
He said consumers were cost-conscious, driving price deflation as Woolworths and Coles brought down shelf prices and forcing the near-1500 independent supermarkets supplied by Metcash to follow. This meant slimmer margins for Metcash as it shipped groceries from its warehouses to its supermarket customers, with shrinking volumes also a likelihood as the independents reserved their cash and drew down on existing inventories of food and general merchandise. Metcash said all its divisions were performing "to plan", with the exception of its flagship food and grocery business.
Shares in Metcash fell 6 per cent on the earnings warning, closing down 20¢ at $3.25.
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Metcash blamed a tougher retail environment for the shock profit downgrade — namely cut‑throat competition from the major supermarket chains, thrifty-minded shoppers cutting back, and an escalation of petrol discount (fuel docket) schemes from rivals such as Woolworths and Coles that hurt volumes and margins.
Metcash said underlying EPS was expected to fall in the high single digits and could be down as much as 9% for the year — a big change from analysts' earlier expectations of around 2% EPS growth.
Shares in Metcash dived nearly 6% on the earnings warning, closing down 20 cents at $3.25 following the announcement at the annual meeting.
Ian Morrice gave a pessimistic assessment, pointing to low consumer confidence and saying the recent escalation in fuel docket promotions was “off the scale” in the first quarter of 2013‑14 and had a clear impact on store volumes and trading.
Metcash and other independents say petrol discount schemes offered by Woolworths and Coles, in some cases up to about 45¢ a litre, were anti‑competitive because independents lack a fuel arm to match those promotions. The company said the surge in these schemes reduced volumes and put pressure on margins.
About 1,500 independent supermarkets supplied by Metcash have been forced to follow down‑the‑aisle price moves, which squeezes margins. Management also noted independents were conserving cash and drawing down inventories, which can reduce Metcash’s shipment volumes.
Metcash said all divisions were performing “to plan” except for its flagship food and grocery wholesale business, where trading conditions were poor and expected to remain weak for the remainder of fiscal 2014.
Investors should follow Metcash’s updates on trading conditions and guidance, monitor developments in petrol discount promotions by Woolworths and Coles, and keep an eye on the company’s food and grocery division performance and any further share‑price volatility resulting from changes in consumer confidence.
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