Metcash shares in strong rebound

Shares rebounded strongly in trade today, with the half-year result slightly better than analysts’ low expectations.

a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Supermarket group Metcash (ASX: MTS) reported half-year results today, with earnings before income tax down 6.3% on the prior corresponding period.

Underlying profit was down 1.9% to $119 million, with the food and grocery division disappointing, while the liquor, hardware and automotive businesses performed reasonably well. The group attributed the drop in earnings to deflationary pressures in Australia, as the price of food and groceries remains locked into Australia’s benign macro environment.

The group is behind supermarket brands and liquor stores such as IGA and the Bottle O. It has been attempting to fight the supermarket duopoly of Woolworths (ASX: WOW) and Wesfarmers (ASX: WES), but the competitive intensity and deflationary environment have proven strong headwinds recently. Price discounting by rivals has forced Metcash to cut its own prices and this has damaged margins and profits even though revenues or sales have grown.

In response, Metcash says it has implemented a strategic review due for completion in February 2014. This includes a food and grocery divisional transformation plan, with six growth drivers to combat competitive pressures and the structural problem of sustained food price deflation. The food and grocery division represents more than three-quarters of group sales, so much will ride on the success of management identifying and executing the right growth strategies.

The group shaved its interim dividend from 11.5 to 9.5 cents per share, a move largely in line with market expectations. Underlying earnings per share (EPS) were 13.5 cents, with the group reconfirming guidance that it expects underlying EPS to be diluted in the high single digits for financial year 2014. The share price has been falling since last autumn, as investors took stock of a tough outlook and expected dividend cut.

Foolish takeaway

As Australia’s third-largest supermarket business, the group has become collateral damage in a price war between Coles and Woolworths. This has eaten into its market share and cut margins. On top of this, Coles and Woolworths have been particularly successful with a relatively new tactic of cross-subsidising fuel and groceries to lock in consumers. To a certain extent the business has been a victim of circumstances beyond its control, but it will need to find earnings growth to reverse its recent decline.

Motley Fool contributor Tom Richardson owns shares in Metcash. 

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

asx share price competitions represented by businessmen arm wrestling
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

person reading news on mobile phone
⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »