Sandstone Insights: is Metcash's supermarket growth enough to counter hardware and liquor struggles?

ASX code: MTS

Suggestion: Hold

Need to know

• In-line result with supermarkets OK, but hardware and liquor struggling. Superior Foods performing as expected
• Total Tools disappointing as earnings before interest and tax (EBIT) falls 16%
• Outlook commentary upbeat thanks to good weather and easing inflation.

Mixed performance across sectors

Metcash delivered a middling result as acquisitions disguise ongoing weakness in hardware and liquor. Food earnings are performing adequately, but the outlook remains tepid despite positive trading comments.

Group underlying EBIT of $246.1 million was in line with last year's figures despite the contribution of Superior Foods from June, while net debt for the first half (H1) of 2025 was $725 million following acquisitions made earlier this year, with leverage sitting at 1.26 times (target range 1.0 times to 1.75 times).

Supermarket

Supermarket sales (excluding tobacco) increased 3.1% with like-for-like growth of 2.2% across the Independent Grocers of Australia (IGA) network.

• Inflation: has subsided considerably to 1.8% in the period compared to 6.5% in the H1 of last year
• Tobacco sales: continue to plummet -16.5% in the H1 2025 to below $1 billion.

Superior Foods

Superior Foods continued sales of $555 million from 3 June to 31 October.

• Campbells & Convenience sales: increased 4.1% to $421 million
• Food EBIT: increased 17.9% to $119.9 million, with Superior Foods being the main contributor
• Food EBIT margin: improved slightly to 2.3% from last year's 2.1%.

Liquor

Liquor sales growth of 2.1% to $2.5 billion reflected the weak industry performance. Metcash's branded outlets are gaining market share as customers chase value across all categories.

• Liquor EBIT: declined -3.3% to $49.1 million reflecting higher labour costs.

Hardware

Hardware remains troubled by weaker trade sales (approximately 64% of total sales). Although total segment sales increased 2.5% to $1.8 billion, helped along by acquisitions, like-for-like sales growth in total hardware fell -5.6%.

Excluding the acquisitions of Alpine Truss and Bianco Building Supplies, figures are as follows:

• Independent Hardware Group (IHG) segment sales: fell 3.7%
• Retail trade: down 6.4%
• Trade: dropped -9.2%
• Do-it-yourself (DIY) sales: down -1.2%, reflecting the soft economic environment.

Total Tools

Total Tools sales increased 1.6%, but EBIT declined 16.5% to $41.3 million due to intense price competition, lower retail store sales and cost pressures. Across the division, EBIT margin at H1 2025 was 3.6%, Total Tools 11.6%.

Metcash H1 2025 earnings results chart

Investment view

Trading over the first four weeks of the second half (H2) of 2025 has been bright with total sales ahead by 8.0%.

• Supermarket wholesale sales are up 2.3%, convenience up 2.9%
• Superior Foods up 6.1% and liquor is up 4.4%
• Hardware has perked up with IHG sales 3.6%
• Total Tools by 2.6% (3 weeks).

The rest of the financial year will depend greatly on how confident consumers are feeling with no interest rate relief in sight and an election looming. The important Christmas period is underway, and Metcash is relying on its platform and product diversity to maintain positive sales growth. It seems clear that the cost pressures on business have yet to dissipate and Metcash is fully aware of this yet finding it difficult to sustain EBIT margin.

At 11 times financial year 2025 price-to-earnings (P/E) ratio and an attractive dividend yield, Metcash looks cheap from a valuation point of view. However, the interim dividend was lowered to $0.085 cents per share in-line with a 70% payout policy, and we suspect consensus earnings downgrades of 12% are possible following yet another ordinary result, made to look better thanks to acquisitions.

Risks to investment view

Consumer spending might recover more quickly than anticipated, leading to improved earnings. Cost pressures could abate sooner than expected, leading to improved margins.

• _{The information provided by Sandstone Insights does not constitute investment advice and does not have regard to the specific needs of any person who may receive it. No warranty is given as to the accuracy or completeness of the information and any person acting on it does so entirely at their own risk.}