Convenience retailer McColl’s (MCLS) is finding growth tough to come by in an ultra-competitive grocery market. Full year results to 27 November 2016 reveal a 1.9% decline in like-for-like sales with declines across its premium convenience, food and wine, newsagents and standard convenience stores.
Nevertheless, the neighbourhood retailer and Post Office operator’s shares trade 1p higher at 178p as management highlights grounds for optimism.
Besides reporting a sixth consecutive year of overall sales growth, up to a record £950.4m (2015: £932.2m), driven by store acquisitions and conversions of newsagents into small convenience stores, McColl’s highlights improving recent sales trends.
Jonathan Miller, CEO, also says the early stage of integrating 298 Co-op stores, acquired for £117m in a deal cleared by the Competition & Markets Authority (CMA) in December, is proceeding to plan.
DEFLATION & DECLINES
During 2016, McColl’s had to contend with grocery price deflation and further declines in tobacco, newspaper and magazine sales, not to mention a rising wage bill. Accordingly, taxable profits dipped to £17.7m (2015: £21.1m), struck after £3.1m of exceptional Co-op-related charges and property costs, although adjusted profit before tax of £19.7m was reassuringly in line with consensus forecasts.
The good news is McColl’s highlights 0.8% growth in like-for-likes in recently acquired and converted stores for 2016. Gross margins grew 70 basis points to 25.1%, reflecting a growing convenience mix including higher margin fresh food and food-to-go products.
GROUNDS FOR OPTIMISM
Moreover, a 1.3% decline in like-for-like sales for the first quarter to 26 February continues to show an improving trend and represents a fourth consecutive quarter of improvement.
Miller remains confident about the relevance of McColl’s strategy in a fast-changing UK retail scene, where Tesco’s (TSCO) takeover of Booker (BOK), the owner of the Londis, Budgens, Premier and Family Shopper store chains, will only increase levels of competition.
‘Although we have not so far seen any discernible impact on customer behaviour following the referendum, wider industry data shows that concerns around price have resurfaced and customers continue to shop around, shopping little and often to manage their budgets. As a leading convenience retailer, we have an important role to play for many of the UK's households,’ says Miller.
STEADIER OUTLOOK
‘Easing industry deflation and group product initiatives underpin a steadier outlook, in our view,’ writes Numis Securities, a buyer with a 225p price target. ‘The group has integrated more than 20 stores from the 298 Co-op outlets acquired in December 2016. These are performing in line with plan and we remain comfortable with our assumptions on the deal, leaving our full year 2017/2018 profit forecasts unchanged, showing EBITDA growth in excess of 20% in both years.’
For 2017, the broker forecasts growth in pre-tax profits to £24.9m and a rise in the dividend, held at 10.2p for 2016, to 10.3p.
