Metcash: Sales Growth Tapers as Temporary Market Share Gains Unwind

We downgrade our fiscal 2024 EPS forecast for no-moat Metcash MTS by 5%. However, the valuation impact of our weaker near-term sales forecast is immaterial. We maintain our AUD 4 fair value estimate with shares in Metcash currently trading at a modest discount.

While the IGA network appears to continue to lose market share, we estimate the hardware segment is growing broadly in line with key competitor Bunnings. Sales growth in the largest segments, food and hardware, decelerated significantly in the 11 weeks to Sept. 3, 2023 versus the previous corresponding period.

Metcash’s sales are overindexed to tobacco sales, and illicit trade and the structural decline in smoking cigarettes is weighing on its grocery business more than at Woolworths and Coles. Excluding the impact of material declines in tobacco sales across the industry, we estimate the IGA network’s food sales have still underperformed the two majors but the delta is less pronounced. While spending on essentials remains relatively defensive, we think Metcash’s business model, which prioritzes convenience over value, is exposed to consumers trading down to lower-price competitors. Management continues to see rising cost of living weighing on consumers, with more shoppers hunting for promotions.

In hardware, sales growth also decelerated since the beginning of fiscal 2024, to 2% in the 11 weeks to Sept. 3, 2023, compared with 5% in the initial seven weeks of fiscal 2024. The smaller trade-focused Total Tools chain continues to significantly outperform the Metcash’s IHG group and its Mitre 10 banner network. Within the more do-it-yourself-focused IHG network, sales growth is broadly in line with Bunnings. In the liquor segment, accounting for about 20% of group profits from operating segments, sales growth accelerated in recent weeks. Nevertheless, we downgrade our fiscal 2024 liquor sales growth estimate to 3% from 4%. All up, we have reduced our fiscal 2024 sales estimate for the group by 4% to AUD 16 billion.