LA Private

Metcash rally fades as warning signs emerge from annual results

Metcash (ASX:MTS) may have reported record annual sales and earnings for the year ending 30 April, but closer examination of the results reveals warning signs that cast doubt on the initial 9% surge in the retailer’s share price on Monday.

By mid-afternoon, the early bounce had halved to just over 4% as investors scrutinized the details and discovered that the strong performance in the first half of the year masked the challenges facing the retail sector since the beginning of 2023.

Debt ballooned during the year, surging from $189 million at the end of the 2021-2022 financial year to nearly $350 million as of 30 April 2023. This significant increase raises concerns, particularly considering the current high interest rate environment.

Metcash also announced the reactivation of its dividend reinvestment plan, a move aimed at conserving cash. The company stated that the reactivation was intended “to provide flexibility for shareholders resident in Australia and New Zealand to reinvest in Metcash cost-effectively, while also delivering incremental support and flexibility for Metcash to pursue attractive growth opportunities. The discount rate in respect of the final dividend has been set at 1.0%.”

In essence, the company is requesting cash from its shareholders, albeit in a polite manner.

Furthermore, Metcash did not provide a clear outlook for the future, except for mentioning the solid sales growth witnessed in the first seven weeks of the new financial year. The company reported a 2.3% increase in group sales during that period, with the Food division performing similarly to the second half of the previous year and Hardware seeing growth compared to the second half of FY23.

Although many investors initially perceived this as positive news, they overlooked the warning in the subsequent paragraph of the announcement. Metcash directors stated, “While demand continues to be solid in all divisions, the impact of higher interest rates and cost of living has started to impact consumer confidence and the behavior of some customers and shoppers in our retail networks.”

This helps explain the gradual fading of group sales growth throughout the year. While sales were up 6.2% for the year ending 30 April (compared to 8.2% in the first half), recent weeks have witnessed a further slowdown, indicating a clear sales deceleration, especially in the food segment.

The full-year dividend for the year was 22.5 cents per share, a 4.7% increase from 2021-22. However, this increase was primarily due to a stronger first-half payout, as the dividend of 11 cents per share in the six months to 30 April remained steady year-on-year.

Underlying profit after tax grew by 4.6% to $307.5 million for the year, whereas at the halfway mark, it had increased by 9% to $160 million.

Revenue for the year amounted to $15.8 billion, representing a rise from the previous year. However, the 6.2% increase fell short of the just under 7% inflation rate for the period and significantly trailed the double-digit price hikes observed in dairy and grain-based products such as bread.

Metcash’s food business achieved a modest EBIT growth of 3.8% for the year, falling behind the rate of inflation and cost increases for most grocery, meat, and fresh produce items. In contrast, the liquor business reported an 8.9% increase in EBIT, while the hardware group (including Mitre 10, Home Hardware, True Value, IHG, Total Tools, and Thriftylink) saw a substantial 16.8% rise in EBIT.

As investors reevaluate Metcash’s annual results, the fading rally in the company’s shares suggests growing concerns regarding the challenges faced by the retail sector and the impact of rising interest rates on consumer confidence.