Housing Crunch For Metcash

Australia | Jun 26 2024

While Metcash has enjoyed resilient food & liquor sales, hardware has been hit by the building downturn. Analysts nevertheless see brighter times ahead.

-Metcash earnings down, but better than expected
-Food & liquor sales holding up
-Hardware hit by a slowing in builder confidence
-Housing cycle expected to turn in 2025

By Greg Peel

Metcash ((MTS)) this week reported its FY24 result, which showed a -1% drop in earnings year on year. The result was nevertheless 2% better than the consensus forecast, and a solid result, analysts declared, in a challenging environment.

Total food sales (ex tobacco) rose 4.6%, as the group benefited from investment in store competitiveness. Food inflation moderated to 1.9% in May. Strong food sales continue to be offset by softness in tobacco sales, which fell -14%.

The growing popularity of vaping, and the growing availability of illegal cigarettes (under the counter at some convenience stores and tobacconists, along with illegal nicotine-based vape liquids), remain a headwind for compliant operators like Metcash. Further regulation and tightened policing of illegal tobacco and vaping could stem this revenue headwind for Metcash, Macquarie posits.

An announcement from the government that vapes will soon only be available in pharmacies, and to adults, has since been forthcoming.

Despite a solid result in food, Citi believes independent supermarkets continue to cede market share, principally to Aldi and Coles Group ((COL)). While continued strong cost management is welcomed, Citi sees limited further upside to margins over the next few years.

Goldman Sachs has been cautious on its outlook for Metcash versus consensus expectations, with one reason being intensifying competitiveness in supermarkets, especially given the onset of Ocado from Coles may result in market share losses in FY25.

A recent Choice survey found the same basket of groceries at Aldi was -25% cheaper than at Coles or Woolworths Group ((WOW)). IGA stores were not surveyed given their independence, with stores setting their own prices. Apples would thus not be apples.

Goldman Sachs' latest channel feedback suggests while the multi-site IGA supermarkets are holding share well, the tail of smaller-format independents are beginning to see more share losses given a higher price gap to the majors.

Liquor was Metcash's strongest division relative to expectations. The company noted it was winning share overall, but was seeing on-premise sales slowing. Macquarie sees medium term upside through expansion of liquor sales into recently acquired Superior Food. The first seven weeks of FY25 trading saw sales up 3.1%.

But food sales (including tobacco) were down -1.7% in the first seven weeks, as they were in FY24 in total.

The Hard Part

Hardware is the most cyclical Metcash division, and is estimated to now represent more than 50% of the stock's value. The hardware division is divided into the Independent Hardware Group (IHG), which includes the Mitre 10 and Home Timber & Hardware chains, along with a couple of smaller chains plus a number of pure independents, and the previously acquired Total Tools chain.

IHG and Total Tools are more trade-oriented than Bunnings ((WES)), and trade is experiencing a more cyclical decline than DIY.

Australia's housing construction backdrop is challenging, notes UBS, with the overall market down -6% (new housing -14%, renovations -3%) and DIY flat (with notable weakness in more discretionary items like outdoor furniture or a new mower).

Metcash noted a "rapid slowing in builder confidence" was negatively impacting demand for hardware. What's more, Metcash was seeing intense competition in tools as Tool Kit Depot pushes for online growth, but stated this competition had eased in recent weeks.

The Tool Kit Depot was formerly Adelaide Tools, rebranded when acquired by Wesfarmers (Bunnings).