Metcash Limited (MTS) is a marketing and distribution company operating in the food and other consumer goods sectors.

MTS is divided into four business units: IGA Distribution, Campbell’s Wholesale, Australian Liquor Marketers and Mitre 10. All of the business units are full owned by MTS with the exception of Mitre 10, which is 50.1% owned.

Last year, MTS completed a takeover of New South Wales supermarket chain, Franklins. The deal was finalised after the Full Court dismissed the ACCC’s appeal to block the merger on the 30th of November.

Margin squeeze

The domestic supermarket industry is dominated by Woolworths and Wesfarmers-owned Coles, with MTS coming in at a distant third.

Significant price deflation has crimped profit margins across the industry, but MTS has been hit harder than its bigger rivals.

Based on semi-annual figures, MTS’ EBITDA margin has contracted over 20% between November 2009 and November 2011.

In that same time, Wesfarmers and Woolworths have seen their EBITDA margins rise 5.4% and 1.7%, respectively.

There may be many other reasons behind the discrepancy, but it is apparent that MTS is struggling to keep up with the aggressive discounting being implemented by Wesfarmers and Woolworths.

Business restructuring

In early April, MTS shocked investors by announcing a $34 – $43 million restructuring charge related to the consolidation of its businesses and the closure of 15 regional Campbells Cash & Carry (Campbells) branches.

Additionally, MTS will book a $75 – $90 million non-cash restructuring charge related to the underperformance of two JVs in Queensland.

The write-downs followed a disappointing 1H12 for MTS, in which its underlying profit rose just 1.4% on-year to $116.6 million.

Campbells was the most disappointing business unit, with EBITA decreasing 35% to $16 million and EBITA margin dropping 73 basis points (bps) to 1.2%.

IGA Distribution – the largest of all the business units – saw its EBITA rise only 0.8% and EBITA margin slipping 5bps to 4.73%.

Outlook

Conditions for supermarket retailers like MTS have been terrible over the past two years and things are unlikely to turn around in a hurry.

MTS is in the unfortunate position of having to contend with two industry behemoths in Coles and Woolworths.

These companies have been forced into aggressive price discounting in order to attract customer sales, and this has come at a huge cost to MTS’ margins.

In response, MTS has looked to streamline its business through consolidation and the closure of its Campbells branches.

However it will be a stock to watch as there are questions as to whether more write-downs may be needed down the track if trading conditions deteriorate further and/or price deflation continues to cut into MTS’ margins.

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