Metcash is due to report its results for the financial year ended 30 April 2017 next month. As long-term members will know, we’ve had an Avoid recommendation on the stock for several years now. The key reason is that independent grocers are most at risk from the intensifying competition that has beset the sector in recent years.
With Woolworths having invested $1bn in prices, Aldi expanding into South Australia and Western Australia and Coles deciding how it might respond, we doubt things will get any easier for Metcash. While revenues continue to rise, earnings have fallen 40% since 2012, with the company’s Food and Grocery business reporting another 8% decline in operating profit in the first half.
While managing director Ian Morrice has taken some steps to improve the business, including making significant cost reductions, buying Home Timber & Hardware from the wreckage of Woolworths’ hardware foray, and cutting net debt significantly, Metcash remains at a significant strategic disadvantage.
Given that, we intend to focus our attention on more prospective opportunities. We’re CEASING COVERAGE and, for the avoidance of doubt, if you've ignored our Avoid recommendations in the past and continue to hold the stock, we recommend you sell and look for stronger businesses.