Metcash Faces Margin Pressure Despite Market Share Gains and Cash Surge

Solid Performance Amid Market Challenges

Metcash Limited (ASX – MTS) has released its FY26 half-year results, demonstrating resilience and strategic discipline in a competitive retail landscape. Despite a near 35% plunge in tobacco sales following new regulations, the company managed to grow overall revenue slightly and deliver positive earnings growth in its core Food pillar.

Group revenue, including charge-through sales, edged up 0.4% to $9.6 billion, while EBITDA rose 2% to $367.2 million. Underlying profit after tax, however, declined 5.9% to $126.7 million, reflecting increased costs and the impact of tobacco’s accelerated decline. Reported profit after tax was stable at $142.2 million, supported by one-off gains.

Food Pillar – Diversification Pays Off

The Food segment stood out as a pillar of strength, growing earnings by 3.5% despite tobacco’s sharp downturn. Metcash’s diversified approach; spanning supermarkets, foodservice, and convenience; helped offset losses in tobacco. The IGA network remains competitive, bolstered by localized offers and the expansion of the “Extra Specials” promotional program in larger stores.

Foodservice & Convenience businesses, including Campbells & Convenience and Superior Foods, posted strong sales growth of 21.9%, driven by new contracts such as the Coffee Club partnership and expansion in petrol and convenience markets. These moves highlight Metcash’s strategy to extend its value chain and deepen relationships with independent retailers.

Liquor and Hardware – Mixed Results

In Liquor, Metcash gained market share amid a challenging environment, with total sales up 1.4%. However, EBIT fell 11.4% to $43.5 million due to lower wholesale price inflation, higher labor costs, and integration expenses. The business’s multi-channel strategy and recent acquisitions, including Steve’s Liquor Warehouse, position it well for future growth despite near-term margin pressures.

Hardware & Tools showed encouraging signs of recovery, with sales growth accelerating in the second quarter. While EBITDA remained flat at $145.6 million, EBIT declined slightly due to margin pressures and increased depreciation. The combined Total Tools and Hardware Group’s return to positive EBIT leverage signals early market improvement, particularly in Queensland and Western Australia.

Digital Transformation and Cash Strength

A key highlight was the rapid expansion of Metcash’s digital B2B marketplace, Sorted, which now accounts for approximately $4 billion in annualized sales and is expected to exceed $6 billion in early 2026. This platform is transforming wholesale operations and accelerating growth across core and adjacent markets.

Operating cash flow surged nearly 60% to $262.3 million, reflecting disciplined cost and working capital management. Net debt remained stable at $598.6 million, with a conservative debt leverage ratio near 1.0x. The Board declared an interim fully franked dividend of 8.5 cents per share, slightly above target payout ratios, underscoring confidence in cash generation.

Outlook – Momentum Maintained

Early trading in the second half of FY26 shows sustained sales momentum, particularly in supermarkets, Total Tools, and foodservice. Metcash’s diversified portfolio, strategic execution, and digital innovation position it well to navigate ongoing market challenges and capitalize on growth opportunities.