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Metcash hurt by intense competition

AAP logoAAP 27/11/2016 Petrina Berry

Food and grocery wholesaler Metcash's earnings have taken a hit from intense price competition and Aldi's expansion into South Australia and Western Australia.

Metcash's profit tumbled 38.6 per cent to $75 million for the six months to October 31, as its core supermarket business suffered an eight per cent fall in underlying earnings to $84.5 million.

Wholesale sales declined four per cent due to independent retailers selling and closing stores, Woolworths cutting prices and Aldi's expansion beyond the eastern states, chief executive Ian Morrice said.

He said the past six months has been the "most intense period of competitive activity" since he took the helm of Metcash in 2013.

"It's quite sobering when you look at the supermarket sector and one per cent like-for-like is the industry norm now," he said.

"We have seen footprint growth from Aldi into SA and WA, we have seen over $1 billion in price investment from the market leader (Woolworths) and competitive responses to that.

"Against that backdrop, we think we have withstood that quite well."

The IGA and Foodland supplier is spending about $45 million a year on helping the independents match Coles and Woolworths' prices.

IGA retailers' like-for-like sales were up 0.3 per cent for the half, which were up 0.6 per cent in the same period a year ago.

Mr Morrice said the lower earnings from food and grocery more than offset earnings growth from the group's liquor and hardware divisions.

He said price competition will continue to be intense in the second half of the 2017 financial year, however earnings are expected to be better in the second half compared to the same period a year ago, partly due to an extra week of trading.

Underlying earnings was up five per cent for the group's liquor business and up eight per cent for the group's hardware business, which includes Mitre10 and the recently acquired Home Timber and Hardware (HTH) group from Woolworths.

The first half included three weeks of HTH trading which contributed $51 million in sales.

Metcash shares have rallied and were trading about five per cent, or 10 cents, higher at $2.075 at 1500 AEDT.

Forager Funds Managment senior equities analyst Daniel Mueller said the better outlook for the second half helped.

"It's not a great result but it could have been worse and the CEO has said grocery wholesaling is expected to be better in the second half, which is a real positive," he said.

Morningstar analysts said in research notes that the independents will find it increasingly difficult to compete on price as Coles and Woolworths open more, smaller convenience stores.

Metcash's acquisition of HTH in October and expenses from its cost-cutting program wiped $7.9 million from its first-half profit, while discontinuing operations had boosted the prior half-year's profit by $35.1 million.

The company will not pay an interim dividend after having not paid any dividends in 2015/16 but plans to reinstate dividends in 2017/18.

INTENSE COMPETITION HITS METCASH:

* Net profit down 38.6 per cent to $75 million

* Sales revenue up 0.3 per cent to $6.63 billion

* No interim dividend, in line with prior half-year.

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