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Why the Metcash share price fell 3.5% today

Businessman pulling rope trying to lift up falling graph.

The Metcash Limited (ASX: MTS) share price fell in morning trade after the company released a trading update and notes from its annual general meeting.

What did Metcash announce?

Grocery and hardware wholesaler Metcash provided the market with a trading update this morning, informing investors that the company’s hardware division had experienced a slow start to the 2020 financial year.

Metcash reported that in comparison to the prior corresponding period, total hardware sales had declined 4.4% in the three months ending July 2019.  The company stated that the performance reflects the loss of a major customer in Queensland and a slowdown in trade sales. Disregarding the loss of its major customer, sales were still down 2.8% in comparison to the prior period.

Slow hardware sales were offset by growth in the company’s food and liquor divisions. Metcash’s trading update reported that total food sales for the three months were up 0.6% in comparison to the same period in 2018, whilst total liquor sales were up 0.7% for the same period.

Following the trading update, Metcash shares fell more than 3% and have since recovered to be down 2% for the day at the time of writing.

How has Metcash performed?

In late June, Metcash released its full-year earnings for FY19 which saw the company report a 3% fall in net profit after tax of $210.3 million. Despite swinging back into profit on a statutory basis, the result missed expectations which saw the Metcash share price plunge more than 17% in three days.

Metcash’s EBIT for the financial year was in line with market expectations, coming in at $330 million. The company’s hardware sector was the standout, adding 17% to EBIT, whilst the food segment contributed 3% to the EBIT line.

Outlook for Metcash

At the company’s annual meeting, chairman Robert Murray informed shareholders that the company remains focused on improving quality and the competitiveness of its independent retailers.

At the company’s strategy day in March, Metcash presented its ‘MFuture’ 5-year strategy to investors. The company’s 5-year vision is focused on delivering sustainable growth whilst also cutting costs and improving competitiveness across its networks.

Foolish Takeaway

Metcash had previously warned the market that hardware sales could come under pressure in FY20 as a weaker economy could lead to a slowdown in DIY and construction. In the food sector, the company remains under pressure to perform against the likes of Woolworths Group Ltd (ASX: WOW), Coles Group Ltd (ASX: COL) and Aldi. However, the company’s liquor business could see some upside with an evolving market and rollout of the Porters brand.

I wouldn’t be rushing to buy Metcash shares just yet. The Metcash share price has come off quite a bit recently and could show signs of bottoming out as negative news is priced in. In the meantime, I would prefer to sit on the side-lines and observe how the company’s 5-year plan plays out.

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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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