Metcash Faces Margin Pressure as Tobacco Declines and Hardware Challenges Persist

Robust Revenue Growth Amid Challenging Conditions

Metcash Limited has delivered a solid financial performance for the year ended April 30, 2025, with group revenue climbing 8.9% to $17.3 billion. This growth was broad-based across its three main pillars; Food, Liquor, and Hardware; despite ongoing challenges such as subdued trade activity in Hardware and a continuing decline in tobacco sales within Food.

Underlying earnings before interest and tax (EBIT) rose modestly by 2.3% to $507.8 million, reflecting strong operational execution and strategic acquisitions. However, underlying profit after tax slipped 2.4% to $275.5 million, impacted by increased finance costs and depreciation related to recent investments.

Food Pillar Drives Growth with Acquisition Synergies

The Food division was the standout performer, with revenue up approximately 11% and earnings surging 18%, bolstered by the acquisition of Superior Foods in June 2024. This acquisition has not only expanded Metcash’s footprint but also created synergy opportunities, including supply chain integration and cross-selling, which are progressing in line with expectations.

Despite a sharp 19.8% decline in tobacco sales; continuing a multi-year downward trend driven by illicit trade; the Food pillar managed to grow earnings through volume gains, increased sales of private label products, and a focus on value promotions. The IGA supermarket network remains resilient, with like-for-like retail sales up 2.7% excluding tobacco.

Liquor Pillar Maintains Market Share Gains Amid Margin Pressure

Metcash’s Liquor business continued to outperform the broader market, achieving further market share gains led by the Independent Brands Australia (IBA) network. Total sales rose 3.4%, with strong growth in beer categories and on-premise sales recovering in the second half.

However, EBIT declined 4.7% to $104.1 million, primarily due to lower wholesale price inflation reducing strategic buying benefits. Despite this, the Liquor pillar’s multi-channel strategy and shopper preference for independent retailers underpin its resilient position.

Hardware Shows Signs of Recovery and Strategic Consolidation

The Hardware division faced subdued trade activity throughout FY25 but showed encouraging signs of recovery in the second half, with sales increasing 2.4% overall. The recent merger of the Independent Hardware Group (IHG) and Total Tools into a unified Total Tools and Hardware Group aims to streamline operations and better support independent retailers and franchisees.

While EBIT declined 10.2% to $189.3 million due to weaker trade volumes and increased depreciation, the improved sales momentum has carried into FY26. Total Tools also saw an improvement in joint venture store margins, signaling a potential turnaround.

Strong Cashflow and Balance Sheet Flexibility Support Growth

Operating cash flow increased 11.7% to $539 million, with a three-year rolling cash realisation ratio of approximately 95%, exceeding guidance. Net debt was reduced to $577.4 million, with a debt leverage ratio of 0.96x, below the company’s target range, providing financial flexibility for future investments.

The Board declared a final fully franked dividend of 9.5 cents per share, bringing the total dividend for FY25 to 18.0 cents, slightly above the target payout ratio of 70% of underlying profit after tax. The Dividend Reinvestment Plan remains available to shareholders.

Positive Start to FY26 and Strategic Outlook

Metcash has started FY26 on a positive note, with group revenue up 4.7% in the first seven weeks, driven by continued growth in Food, Liquor, and Hardware. The recent binding agreement to acquire Steve’s Liquor Warehouse further strengthens the Liquor pillar’s market position.

CEO Doug Jones highlighted the company’s strategy of 'winning with independents' and moving closer to shoppers as key to future growth. The structural mergers within Food and Hardware are expected to enhance operational resilience and create new opportunities for profitable expansion.