Metcash Outlook: Tobacco Sales vs Rate Cuts

Australia | 1:08 PM

Metcash's FY25 result was solid, showing reliance in Food & Liquor. Signs are positive for a recovery in Hardware, but rate cuts are key.

-Metcash FY25 earnings at top end of guidance
-Food & Liquor solid, despite declining tobacco sales
-Hardware set to improve on RBA rate cuts
-Visibility on Hardware's recovery timing and magnitude remains limited

By Greg Peel

Grocery wholesaler and hardware group Metcash ((MTS)) reported FY25 (year-end April) earnings at the top end of guidance updated earlier this month, and added a positive trading update for the first seven weeks of FY26.

The company posted a solid performance in its key Food division, increasing earnings in the second half even as tobacco sales plunged -23% amid a boom in the illegal tobacco trade. Amortisation charges from the Superior Foods acquisition weighed on the result, but the new business's underlying operations made a solid showing, Ord Minnett suggests.

Supermarket sales growth ex-tobacco in the first seven weeks of FY26 was a pleasing 2.9%, driven by private labels, more competitive pricing, and refreshed stores.

The hardware division's second-half performance was better than analysts expected, with a tight rein on costs and much smaller contraction in margins than seen in the first half, while early FY26 sales are up 1.3% on a year ago.

It is a difficult environment for hardware, all agree, but Metcash has set the business up well for any improvement in consumer confidence.

Impressive operating cash flow and reduced capital expenditure meant net debt came in at $577m, well below Ord Minnett's forecast for $921m. Reduced guidance for capital expenditure in FY26 should drive further growth in cash generation.

Hardware

Metcash's Independent Hardware Group (IHG) is the largest independent hardware group in Australia, and a leader when it comes to servicing the Trade market.

Mitre 10 is the country's largest independent network of hardware operators with over 300 stores, servicing retail but with a leaning towards Trade. Total Tools is franchisor to the largest professional tools market in Australia, while Home Hardware is also Trade-focused, along with a handful of smaller operators in the hardware group.

The key positive from the Hardware result, suggests Macquarie, was an improvement in earnings margin, with some 40 basis points of expansion in the second half from the first. This was driven by IHG, with margins up 70bps half-on-half on execution of cost management initiatives.

This compared to Total Tools with -80bps of compression, although management called out improving retail margins through the second half and into FY26. In the near-term, better margins have offset like-for-like sales growth, which remains subdued. The first seven weeks of FY26 saw 0.8% growth for IHG but -2.7% for Total Tools.

Longer-term, Macquarie has lifted its Hardware earnings forecasts as cost efficiencies are set in the base and the top-line improves alongside housing conditions.

Housing conditions remain somewhat of a sticking point.

Hardware network sales and earnings were broadly flat in FY25, suffering higher D&A expense due to acquisitions. These businesses have been a source of underlying sales and earnings declines due to subdued trade activity and cost of living pressures, UBS notes.

IHG has shown signs of improvement since the fourth quarter, while Total Tools' momentum remains subdued. Looking forward, UBS suggests lower interest rates should support trade activity and ease cost of living pressures, with operating leverage for retail and wholesale a driver of forecast earnings margin expansion.

Citi is not so confident.