Grocery wholesaler Metcash Limited has delivered mixed full year results, amid what it says are “tough trading conditions”.

The Company announced a drop in sales in its food and grocery sector of 2.3 per cent from $9.3 billion to $9.1 billion, which it said were largely due to the closure of several of its Campbells branches, and a number of Cornetts and Walters stores in Far North Queensland and Western Australia.

Overall Group Wholesale Sales rose 3.8 per cent to $13 billion, and profit after tax rose 129 per cent to $206 million. Metcash Limited said the rise reflects “the cycling of restructuring charges booked in the prior year, a strong result from the liquor division and increased investment in new business”.

Underlying profit after tax rose 6.9 per cent to $281 million, while underlying earnings per share declined 4.4 per cent, which Metcash Limited said reflected the fact that most of the investments funded by the equity raising occurred part way through the year and did not deliver a full years’ earnings. The Company said it recorded a strong operating cash flow, rising 5.5 per cent to $300 million, reflecting the underlying earnings and improved working capital performance.

Metcash Limited announced a strong dividend payout ratio, paying 86 per cent of underlying earnings per share, with the final dividend of 16.5 cents per share taking the full year dividend to 28 cents per share.

“It is a challenging time for the independent retail sector with consumer confidence low and the self-service supermarket chains locked in a marketing war,” said Andrew Reitzer, outgoing Metcash CEO. “Most particularly, as a wholesaler, we have also had to weather the impacts of continuing price deflation,” he said.

Mr Reitzer has been with Metcash Limited for 15 years, and will step down from the CEO role on 30 June 2013. Ian Morrice will take on the top job.

“The core grocery business has performed reasonably in light of the difficult market conditions, Australian Liquor Marketers (ALM) is performing extremely well, Hardware and Automotive is performing in line with expectations, and the strategic acquisitions are progressing soundly,” Mr Reitzer said.

Metcash Food and Grocery

Metcash Food and Grocery sales fell by 2.3 per cent from $9.3 billion to $9.1 billion. EBITA declined from 5 per cent from $398 million to $378 million, which Metcash said reflected the deleveraging effect of deflation as well as significant additional investment in marketing and increased utility and transport costs.

The Supabarn wholesale supply contract was re-established and contract supply to Spotless operations in Western Australia and Queensland was also won. Metcash said the Franklins conversions were “working well” and, despite more store closures than anticipated, the “strategic footprint” achieved for IGA in New South Wales (NSW) was “significant”.

Metcash said its Food and Grocery sector responded to the market conditions with a focus on marketing and merchandising strategies. The relaunch of the Supa IGA supermarkets in NSW and new advertising campaigns featuring comedian Anh Do had proven successful in raising the brand presence of IGA as well as showcasing the Metcash consumer proposition: “Ranging, Fresh, ‘Locked Down Low Price’”, and the contribution IGA makes to its local communities through the ‘Community Chest Program’.

Fifty-one new IGA stores were opened during the year. When combined with conversions, extensions and refurbishments, Metcash said a total of 62,693 square metres had been added to the IGA “store footprint” across Australia. In addition, 50 stores were the subject of buyback and were “put into hands of focused retailers”, resulting in an increase in sales.

In Convenience, Metcash said the single pick KNAPP system is now fully operational at the Huntingwood DC, providing the division with “an advanced single pick system for Convenience customers”. Metcash said the technology picks an average of 25,000 single items per day, with the capacity to increase to 35,000 single items per day in peak periods. Also in Convenience, Metcash said it opened a new concept store, ‘Value Depot’, in Brisbane, which exceeded its forecast sales and EBIT targets.

“The impact of deflation has continued and we have been affected by the deregulation of trading hours in WA,” said Mr Reitzer. “This together with some store closures has resulted in a small decline in out market share in Metcash Food and Grocery. We have met this challenge by focusing on a comprehensive national marketing strategy,” he said.

“The restructured supermarket joint ventures and the contribution from the converted Franklins stores have provided an important boost to the IGA network. The relaunch of the Supa IGA channel in NSW has seen our brand presence grow markedly in that state,” Mr Reitzer said.

Australian Liquor Marketers

Metcash said Liquor performed strongly, with sales growth of 24.9 per cent and EBITA of $47 million, an increase of 35 per cent. The Company said the strong performance was driven by the contract with Liquor Marketing Group Limited and Hotel and Tourism Management Pty Limited (LMG) as well as “improved execution and a better retail offer at store level”, which Metcash said drove “organic growth” in the underlying business. According to Metcash, the increased volume was successfully integrated across the network, “enabling improved operating leverage to reduce the average cost of doing business”.

The Company said its liquor sector maintained its position as having the second largest retail footprint, and continued to grow volume even while the overall market declined.

ALM rolled out larger-format retail stores in several locations, which Metcash said have performed well, with suppliers responding positively. Three hotel acquisitions were made during the 2012-13 financial year and Metcash said it will continue to pursue this strategy “as opportunities present themselves”.

Hardware and Automotive

According to the Company, the Hardware and Automotive pillar performed strongly, with sales growing 12.6 per cent and EBITA growin 70.8 per cent to $30 million as a result of “solid business performance”, acquisitions in Mitre 10, and the addition of the Automotive Brands Group (ABG).

Metcash said Mitre 10 continued to strengthen its distribution network with the creation of seven new joint ventures. In addition, 20 new Mitre 10 stores joined the network in the 2012-13 financial year. The Company said the new stores brought the total number of stores converted to Mitre 10 in the last two and a half years to 52, with 33 of those coming from its major competitor.

Metcash said the automotive side of its business was performing well and in line with expectations. It said the focus was now on “future growth” and that “the automotive aftermarket sector provides Metcash with significant opportunities”. According to Metcash, the sector is worth $5.6 billion.

The Company said the acquisition of Australian Truck and Auto Parts (ATAP) in May 2013 is the next stage in this consolidation. ATAP’s network includes distribution centres in all major cities, including a presence in NSW, where Metcash did not previously have a distribution centre.

Future Plans

Incoming CEO Ian Morrice said he thought the results were creditable in such difficult economic conditions, and that the challenges in the Food and Grocery pillar will be addressed in his plans for the Company’s ongoing strategy.

“I have initiated a strategic planning process, which will be complete by the end of 2013,” Mr Morrice said. “This process will develop our strategic priorities, growth opportunities and build on the great platform that Andrew (Reitzer) and the team have created,” he said.

“A key priority will be to review the Food and Grocery operations to respond to the ongoing deflationary and competitive market conditions. There is an ongoing focus for the group as we continue to invest in our core logistics capabilities, and optimise the value of recent acquisitions and supply contracts,” Mr Morrice said.