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Metcash: Feeling the squeeze

Metcash Limited (ASX: MTS) shares were placed in a trading halt today pending the outcome of a board meeting on Monday.

Metcash said in a statement today: “A trading halt is requested pending a board meeting on Monday to consider management recommendations which, if agreed to by the board, could result in impairment charges.

Franklins

We don’t yet know what the impairment charges may be for, but speculation centres on the company’s purchase of 80 Franklins stores in 2011, which cost the company $215m. Metcash is in the process of selling the 80 stores to IGA retailers, and as at 11th November 2011, the company had received over 200 expressions of interest to buy the stores.

Increasing pressures

Metcash is currently facing its worst year in more than a decade. In competition with Woolworths Limited (ASX: WOW) and Wesfarmers Limited (ASX: WES) -owned Coles, and faced with weak consumer spending, sales growth has been very hard to come by, despite opening a record 68 stores.

The company is also part owner (50.1%) of Mitre 10, which is facing intense competition from market leader, Bunnings (also owned by Wesfarmers), and Woolworths new home improvement offering, Masters.

Bunnings stepped up the pressure on both Mitre 10 and Woolworths today, with an announcement that it plans to build up to 85 new stores in Australia over the next three years. Bunnings opened its 200th store today, while Woolworths has just 8 Masters stores open currently.

The Foolish bottom line

Metcash is the meat in the sandwich, in both the supermarket retailing and home improvement sectors, being squeezed by Woolworths and Wesfarmers.

Should the board agree to management recommendations, net profit is likely to take a hit when the company reports its full year 2012 profit.

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More reading

Motley Fool contributor Mike King owns shares in Woolworths. The Motley Fool’s purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Click here to be enlightened by The Motley Fool’s disclosure policy.

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