Metcash warns on 2014 profits
Recommendation
When we reviewed Metcash’s full-year result, on 25 Jun 13 (Avoid – $3.74), we wrote that ‘underlying earnings per share will struggle to maintain their current level at 32.6 cents’. So we weren’t surprised when new chief executive Ian Morrice said at last week’s annual general meeting that he expected an underlying earnings contraction ‘in the high single digits in the current year’.
The AGM presentation referred to low consumer confidence, due to instability from the election, the exchange rate and house prices. The food and grocery sector, in particular, is being driven by a ‘cost-conscious consumer’ and ‘high promotional intensity’ [aka a price/marketing war] which the company expects to continue to push down prices.
The company noted that its retailers were responding by reducing costs and inventory, but there was no sign of any steps to solve the problems in its business model – that it’s being crunched by the increasingly proactive supermarket majors (and ‘newcomers’ such as Costco and Aldi), without the flexibility to respond.
Management is conducting a strategic review of its food and grocery operations and we should hear more of its progress alongside the half-year results in December – but we're not holding our breath for any easy fixes. The stock is down 13% since 25 June. AVOID.