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Why the Metcash share price hit a 3-month high on Tuesday

A positive trading update has served as a powerful catalyst, supercharging the Metcash Limited (ASX: MTS) share price. Metcash shares in the closed Tuesday’s trading session at a 3-month high of $2.80, following a rough period for retailers in recent times.

Cutting the fat

Retailers across Australia have had to battle torrid terrain in recent times, plagued with ever increasing online competition and slower growth forecasts. Metcash Limited has looked to adapt to this changing environment by cutting costs, refurbishing stores and establishing a greater online footprint to meet consumer demand.

The company operates as the owner and wholesaler for prominent brands including IGA supermarkets, Mitre 10 hardware outlets and Celebrations liquor stores. Last week Metcash released a trading update which highlighted marginally higher food sales, in comparison to the previous year, whereas liquor sales were relatively strong. On a softer note, hardware sales where lower, with the company citing a slowdown in the construction and trade sector as the reason. In addition, the update announced an exciting $270 million, five-year plan to reduce costs and improve revenue growth.

M-Future

A new strategy called ‘M-Future’ was unveiled, which looks to balance revenue growth, whilst also reducing costs and delivering long term sustainable growth. Part of the strategy identified the need to tailor supermarkets to suit their locations by differentiating product ranges and store sizes. As a result, the company is looking to invest $165 million to refurbish its IGA supermarkets over a five-year period.  This includes rebranding, establishing a new loyalty program and other promotional platforms. M-Future also looks to invest around $15 million into acquiring independent liquor retailers improving the company’s market share in the sector. Another $90 million is bookmarked to refurbish hardware stores, expand their product ranges and establishing a click-and-collect service.

Foolish takeaway

In my opinion, the manic response to the Metcash trading update is a great positive for the future of the company.  However, the retailing environment remains challenging and as traders and investors look to take profit on the recent momentum, more sensible, low-risk entries may be available.  As the company looks to reduce costs and improve revenue growth the long term outlook looks promising.

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Motley Fool contributor Nikhil Gangaram 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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