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Here’s why the Metcash share price fell 22% in 2018

Credit: Scott Lewis

The Metcash Limited (ASX:MTS) share price fell 22% in 2018. Here are the three major company-specific factors which led to a disappointing year for Metcash investors.

1. Loss of a major customer

2018 was looking positive for Metcash until it announced on 28 May that it had plans to build a new distribution centre in South Australia which, if approved, would result in significant operational efficiencies and access to a broader range of products.

The catch? Drakes Supermarkets would not have its supermarkets in South Australia supplied by the new distribution centre, instead intending to build its own. The company attributed this as the “primary driver” in a $352 million impairment to goodwill and other net assets, which ultimately led to a $149.5 million statutory loss for FY18.

Alongside this announcement, the company issued guidance for FY18 which revealed an expected decline in sales. Together, these two bad news items prompted a major fall in share price.

2. Weak growth in food

The Metcash share price fell lower in December upon the release of its 2019 fiscal year results. One reason was perceived stagnation of the Food segment, with sales growth of 1.0% on 1H18 being primarily driven by inflation.

Metcash’s Food segment comprises over 70% of total sales. The segment has faced continued pressure from intense price competition over the years, particularly due to the Aldi-Woolworths-Coles trifecta, which Metcash fails to compete with on a price basis. Also, the expected launch of German retailer Kaufland into the Australian market represents a significant downside risk; it wouldn’t be the first time Metcash had suffered at the hands of a German discount supermarket chain.

3. Housing downturn concerns

Strong performance in the Hardware segment for 1H19 was attributed to synergies from the Home Timber and Hardware acquisition. On a normalised basis,the result was less impressive. Additionally, the increasingly bearish housing outlook is a downside risk, and Hardware could face growth issues once the HTH synergies run out.

Motley Fool contributor Cale Kalinowski has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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