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Metcash takes earnings hit

Business

Supermarket wholesaler Metcash has taken a huge earnings hit to its core food and grocery business as it tries to keep up with Coles and Woolworths while fending off the aggressive expansion of Aldi into South Australia.

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Metcash, which supplies independent supermarkets, including IGA, Foodland and Foodworks stores, posted a $216.5 million annual net profit on Monday, bouncing back from a $384.2 million loss 12 months ago.

However, the positive headline figure and Metcash’s plans to reinstate dividend payments was overshadowed by a 17 per cent decline in its supermarket division’s earnings before interest and tax.

The decline offset growth in the group’s two other divisions, hardware and liquor, to drag Metcash’s overall EBIT down 7.4 per cent to $275.4 million.

Metcash shares plunged by as much as 14 per cent during trading in reaction to the results, ending Monday down 26 cents, or 12.5 per cent, to $1.86.

Chief executive Ian Morrice said Metcash had made “significant progress” in its two-year-old transformation plan but warned the groceries business would continue to face “headwinds” from competition, deflation and rising costs.

“We are anticipating continued deflation in the market and there’s new competition, particularly in Western Australia and South Australia,” he said on Monday.

“We see competitive conditions will continue to be challenging.”

Aldi has begun aggressively expanding in South Australia and Western Australia with the independent supermarkets that Metcash supplies tipped to lose the most market share.

Investors were looking for signs Metcash’s supermarket division was stabilising, optionsXpress market analyst Ben LeBrun said.

“But those numbers show it’s still in decline,” he said.

“The outlook in terms of costs rising, deflation and competition have not done anything to allay concerns that Metcash’s core supermarket business is under significant pressure.”

Metcash is pouring about $45 million a year into helping IGA stores match Coles and Woolworths’ prices on a core basket of goods.

The hefty investment has shown some encouraging signs with IGA stores’ like-for-like sales lifting 1.4 per cent in the 12 months to April 30.

However, Metcash’s food and grocery sales only rose 0.5 per cent.

Morrice said the competitive environment would ultimately lead to a smaller number of better performing retailers with Metcash losing about 30 independents, due to store closures, in FY16.

The company sold its automotive business for $285.4 million last year, using proceeds to pay down debt and cover restructuring costs.

The debt reduction and cash management has helped put Metcash in a position where it can reintroduce dividend payments in FY17 after it stopped them nearly two years ago.

Metcash, which also owns hardware chain Mitre 10 and liquor businesses, including Cellarbrations, recorded a 1.3 per cent lift in sales revenue to $13.54 billion in FY16.

– AAP

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