Hardware boost for Metcash despite $149.5m loss

IGA-exteriorGrocery wholesaler Metcash has recorded an annual loss of $149.5m – hit by the $352 million impairment within its food pillar –  though the company’s hardware division helped boost its underlying profit result for the full year.

Underlying profit after tax increased 10.7 per cent to $215.6m, boosted by earnings growth in Metcash’s hardware pillar.

Metcash generated sales revenue of $14.46bn, an increase of 4.3 per cent on the prior financial year after adjusting for a 53 trading week in FY17, largely reflecting the inclusion of Home Timber & Hardware (HTH) for a full financial year.

Hardware sales increased $520.1m to $2.10bn, reflecting the inclusion of a full year of sales from HTH.

The loss after tax of $149.5m comes after the impairment of goodwill and other net assets of $345.5m in the company’s food pillar, announced after losing its biggest customer in South Australia, Drakes Supermarkets.

Group EBIT increased 9.2 per cent to $332.7m.

Food sales declined 1.2 per cent to $8.90bn while supermarkets sales declined 1.4 per cent, with growth on the Eastern seaboard more than offset by lower sales in South Australia and Western Australia.

In a statement to the ASX, Metcash said intense competition continued across all states, with Western Australia “again the most challenging market due to the ongoing roll out of competitor footprint and weak economic conditions.”

Supermarkets wholesale sales (excluding tobacco) declined 3.6 per cent, with deflation “continuing to be a key driver of the decline as competitor investment in price and promotions remained at high levels”. Grocery deflation for the year was 2.4 per cent.

Liquor sales increased 5.7 per cent to $3.47bn.

“It was pleasing to see the group deliver underlying earnings growth despite the continuation of highly competitive and challenging markets, particularly in the food pillar,” said Metcash Group CEO, Jeff Adams.

“The integration of HTH is now largely complete, with the hardware management team ensuring the support of the independent retail network and delivering synergies ahead of the target set at the time of the acquisition.

“The business continued to generate strong cash flows, and with a cash conversion ratio of around 100 per cent we ended the year in a net cash positive position.

Adams said the benefits of the company’s Working Smarter program had mitigated the impact of difficult market conditions.

“We are now in the final year of this program and expect additional savings to be delivered in FY19,” he said.

“Going forward, the next phase of our strategy aspires to deliver both growth and efficiencies over the next five years.

“Our focus on operational efficiencies will include looking to address the impact on operating leverage in South Australia related to the loss of supply to Drakes Supermarkets post FY19.

Adams also announced Metcash will undertake $125 million off-market buy-back and also pay a final dividend for the year of 7.0 cents per share, fully franked.

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