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Why the Metcash Limited (ASX:MTS) share price is being crushed today

The Metcash Limited (ASX: MTS) share price has been one of the worst performers on the market on Monday.

At the time of writing the wholesale distribution and marketing company’s shares are down 13% to $3.20.

Why are Metcash’s shares sinking lower?

This morning Metcash released an update relating to plans for a potential new purpose-built distribution centre in South Australia.

According to the release, if the distribution centre is approved and constructed, it will enable local independent retailers in South Australia to benefit from significant operational efficiencies, as well as accessing a broader range of products. It would also benefit local suppliers through the opening of a pathway to access Metcash’s extensive distribution network.

Management has advised that it has received support for the proposed distribution centre and long-term supply from its major independent retailers in the state, except for Drakes Supermarkets.

Drakes has told the company that it will not be making a commitment to have its supermarkets in South Australia supplied from Metcash’s proposed new distribution centre.

This would be a major blow to Metcash as the total sales including tobacco to Drakes Supermarkets in South Australia were approximately $270 million in FY 2018.

The current supply agreement with Drakes Supermarkets in South Australia runs to June 2019 and it is starting to sound like it may not be renewed. Though at this point it is worth noting that Drakes Queensland has not advised of any plans to change its current supply arrangement with Metcash.

Management intends to provide a further update regarding the Drakes South Australia news with the release of the company’s FY 2018 results on 25 June 2018.

In addition to this, the company slipped in a trading update which revealed that it expects its Supermarkets & Convenience segment to report a 1.2% decline in total sales and a 3.6% decline in wholesale sales excluding tobacco for the year ended 30 April 2018. Segment earnings are expected to be in line with the prior year.

Should you buy the dip?

As we have seen previously with Sigma Healthcare Ltd (ASX: SIG), the potential loss of a major contract can weigh heavily on a share price. I expect Metcash to be no different. Especially with the future supply agreement with Drakes in Queensland possibly hanging in the balance as well.

Because of this, I would suggest investors stay clear of Metcash for now and focus on other options in the retail space such as Premier Investments Limited (ASX: PMV) or Super Retail Group Ltd (ASX: SUL).

I fear that this latest development could put Metcash's dividend at risk. So investors in search of dividends might want to skip Metcash and consider this top dividend share.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Premier Investments Limited. The Motley Fool Australia owns shares of Super Retail Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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