Independent food wholesaler Metcash has been hit by a $237.4 million impairment charge following the end of its lucrative supply deal with convenience chain 7-Eleven.
In a statement to the market on Tuesday morning, the retailer said it would recognise the charge in its half-year results, which covers the six months ending October 31.
The write-down will primarily be to Metcash’s goodwill, which refers to intangible assets such as the value of its brand name. Part of the write-down also relates to the company’s food division.
The write-down is an additional blow to the already-struggling retailer which is best known for supplying IGA supermarkets and the Mitre 10 and Home Timber & Hardware home improvement chains.
Last month, the company confirmed convenience store 7 Eleven would cease its lucrative supply contract with the distributor, worth about $800 million.
With the contract set to end by August 2020, Metcash also flagged a $15 million hit to the retailer’s earnings before interest and tax (EBIT) in its food division.
At the time, chief executive Jeff Adams told The Sydney Morning Herald and The Age the situation was “disappointing” but the retailer could not comply with 7-Eleven’s seven-day delivery and four-hour fulfilment windows.
“You can do those things, but they become very expensive. It just reached a point where the contract was going to lose money, there was no point in continuing,” Mr Adams said.
Following today’s announcement, shares dropped 2.3 per cent to $2.88 before recovering slightly to close down 1.3 per cent at $2.91.
It’s the second significant impairment the $2.6 billion retailer has booked in two years, with the company surprising investors in June last year with a $352 million write-down, the majority of which was to the business’ goodwill.
It’s also the second major contract the company has lost in the last 18 months, with Drakes Supermarkets cutting its $270 million contract with Metcash in South Australia in order to self-supply its stores in the region.
Credit Suisse analyst Grant Saligari said while both the impairment and $15 million earnings hit were in line with expectations, Metcash was still “fairly challenged”.
“You’ve got two major customers where their actions are indicating they believe they can provide an alternative supply chain that’s more capable and at a better cost than Metcash can provide,” he said.
“If that’s the case, you’d need to think about why that capability gap exists.”
The fresh impairment will be marked as a significant item on the company’s accounts and is likely to wipe out the retailer’s half-year profits, with its earnings for the 2019 financial year dropping 3 per cent to $210 million.
At the company’s first-quarter results in August, the business warned of a slowdown in its hardware division, driven by a slow housing market and the loss of an unspecified major wholesale customer.
Metcash will implement other cost savings in an effort to offset the loss incurred by the contract end, but noted under Australian Accounting Standards, goodwill assessment cannot factor in future cost savings.
Further cost savings planned for the wholesaler include $50 million in cuts “across the board”, including in marketing, property and supply chains.
However, Mr Saligari believes the company may not be able to “save its way to success”, and while the cost-cutting would mitigate the impact, it was unlikely to completely negate it.
Metcash is set to release its half-year results on Thursday.
Extracted from The Sydney Morning Herald