Risks associated with the recent collapse of wholesaler Palmer and Harvey (P&H) and a dip in fourth quarter sales are weighing on the share price of convenience chain McColl’s Retail (MCLS).
Shares in the company are off 2.6% in early trade on Monday at 282.5p, to interrupting an otherwise firm run for the stock in 2017.
Nevertheless, the convenience stores-to-newsagents operator sounds confident about its future prospects. Under a wholesale tie-up announced in August, Morrisons (MRW) will shortly supply all of McColl’s stores, replacing P&H and Nisa, while sales in McColl’s acquired stores and refreshed convenience outlets are showing improvements.
TOP LINE TOPS £1BN
In a full year pre-close trading statement, McColl’s reports 19.1% total revenue growth for the year ended 26 November, annual revenues topping £1bn for the first time following the successful integration of 298 convenience stores acquired from the Co-op.
Also the largest operator of Post Offices in the UK, McColl’s says it is on track to meet full year expectations. Liberum Capital is looking for pre-tax profit improvement from £20.8m to £25m.
Fourth quarter like-for-like sales fell 1.1%, impacted by poor confectionery and newspaper sales as well as unfavourable weather.
Yet encouragingly, full year like-for-like sales edged up by a better than expected 0.1%, driven by convenience stores more than offsetting newsagents and McColl’s sales mix shifting towards higher margin, higher growth groceries.
THE P&H IMPACT
CEO Jonathan Miller insists ‘As we look ahead to next year, we will focus on delivering an enhanced customer offer in over 1,300 stores through the groundbreaking wholesale partnership we signed with Morrisons, which will see us launch hundreds of Safeway branded products, exclusively in McColl's from January 2018.’
This is a vital tie-up for McColl’s, since long-time supplier P&H was placed into administration last week (28 Nov). Within its 1,611-strong estate of stores, around 700 newsagents and smaller convenience stores were supplied by P&H.
A buyer with a 300p price target, Liberum concedes ‘there are short-term risks relating to Palmer and Harvey's fall into administration, which need to be watched, but we believe McColl's is better placed than many of its competitors to deal with the situation.’
The broker continues: ‘McColl's will clearly be well into its planning to switch to Morrisons as its sole supplier over 2018, but Palmer and Harvey's administration (announced last week) at this point in time could be a disruption.
We think McColl's strong relationships with suppliers of scale, including both Nisa and Morrisons, mean that it is well placed to deal with the situation, but there are some near-term risks.’
‘On the positive side, P&H currently has a portfolio of circa 120 retail stores (including some franchise stores) operating under the Central brand, so there could be an M&A opportunity for McColl's here.'
