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Australian supermarkets - Why are supermarket volumes declining?

The risk to supermarket revenue

24 May 2024

Australian supermarket volumes are likely to drop by 2% in FY24e on a per capita basis, which is a continuation of declines seen since March 2022. While higher food prices may explain some of the softness in volumes, other factors are at play including channel leakage, lack of store refurbishments and less new product innovation. We forecast 3.0% comparable sales growth for the supermarket sector in FY25e, but a downside case of 2.3% is possible if volumes continue to decline. A low rate of comp sales growth would be very challenging given comp cost growth is unlikely to fade. Weaker comp sales will put downward pressure on Coles and Woolworths profit margins.

Australian supermarkets - Is ROE the key measure?

Reflections on return on equity

22 April 2024

The Senate Inquiry into Supermarket Prices has escalated into a debate about the merits of return on equity (ROE) as a measure of profitability. We certainly prefer ROE and other returns measures over percentage profit margins. However, in the case of Woolworths, the ROE of 27% (pre sig items) is influenced by historical cost accounting, buybacks and demergers. Care needs to be taken in looking at a single year.

Metcash (MTS) - 2024 Investor day

Accelerating growth and capex

15 March 2024

Metcash’s investor day made it clear that it is looking to accelerate growth. This growth will increasingly come from store openings and Metcash will need to spend more capex to facilitate the growth. The company is in a stronger position to grow given the profitability across the network and capability of management.

Metcash (MTS) - Rational acquisition & trading update

Our take on Superior Foods and hardware acquisitions

08 February 2024

Metcash’s acquisition of Superior Foods and two mid-sized hardware businesses is sensible and, in our view, best described as fairly priced. The upside in value for Metcash shareholders will come from realisation of synergies by FY26e, with potential value creation as Metcash builds scale in the foodservice and frame & truss sectors.

Metcash (MTS) 1H24 result analysis

Rising rates dent earnings

06 December 2023

Metcash reported a soft 1H24 result with sales up 1.3% and EBIT down 3.4%. The drop in EBIT was concentrated in the Hardware division and further margin pressure is likely given soft demand and rising operating costs. The Food segment has once again confounded sceptics by growing sales (ex tobacco) close to market growth and liquor is performing well. Metcash’s significant capex and acquisition outlays along with rising rates will lift finance costs over the next 18 months.

Metcash (MTS) - Total Tools Acquisiton

Adding to the toolkit

17 November 2023

Metcash has announced the put option on the remaining 15% of Total Tools Holdings was exercised. The rapid increase in valuation of Total Tools highlights what a well-timed acquisition it was. The initial 70% stake was at an enterprise value of $81 million and this final 15% is at an EV of $677 million. While relatively small, the accounting for Total Tools will result in 2.7% EPS dilution on our estimates from this additional stake. Metcash’s Hardware division accounts for 49% of our enterprise value and the success with Total Tools is a key plank of that. We have a Buy rating and $4.50 target price.

Metcash (MTS) FY23 result insights

Sales resilience deserves recognition

29 June 2023

Metcash reported FY23 EBIT up 8% and 2H23 EBIT up 5%. While there has been some concern about a drop in demand, Metcash has demonstrated good sales trends relative to industry growth in all its segments. The company may not buck broader industry trends going forward, but its valuation provides a margin of safety relative to peers.

Supermarket margins up

Shaping up as a good FY23e

04 August 2022

We expect a strong year of earnings growth for Australian supermarkets in FY23e. Higher food inflation is boosting sales and gross margins are also rising. We lift our FY23e EPS forecast for the major chains. Woolworths has the strongest sales growth, followed by Metcash, then Coles based on our feedback. In the full report, we address the cycle of price inflation and outlook over the next 12 months; and the outlook for Coles and Woolworths gross profit margins and EBIT margins.

Metcash (MTS) FY22 result

More than just COVID-19 gains

27 June 2022

Metcash reported FY22 sales of $17.4 billion and EBIT of $472 million. Adjusting for the 53-week in FY22, sales rose 4% and EBIT rose 16%. The results reflects higher price inflation across all divisions and a mix-shift towards the Hardware division, which has higher margins. Metcash has been able to hold onto much of its customer gains made during COVID-19. While we expect a lack of EPS growth over the next two years, the company’s competitive position has improved in each division.

Metcash (MTS) Fundamentals are better

Market share stable in supermarkets, hardware still has a runway for growth

14 June 2022

We expect the stock to perform well as the market better understands the benefits Metcash has from higher inflation, the fundamental improvement in its Food market share and multiple revenue drivers in Hardware. Metcash’s market share in grocery has been stable since 2018, a function of its retailers’ better relative price position and less aggressive store openings by rivals. In its Hardware segment, Metcash will benefit from Total Tools store rollout as an offset to a cyclical industry-wide decline in late FY23e.

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