Metcash (ASX:MTS) is currently the fifth highest ranked consumer defensive stock. It is a food, liquor and hardware business. They are primarily a wholesaler, distributing products to independently owned retail stores across the country. These include supermarkets under the IGA brand, a range of liquor stores such as Cellarbrations and hardware stores like Home Hardware and Mitre 10. They have over 5,400 stores in their network.
In the current economic environment, high inflation and interest rates are leading to uncertainty regarding the outlook for consumer demand and economic growth. This has seen the Consumer Cyclicals sector decline, with the S&P/ASX 300 Consumer Discretionary index falling 3.3% since 15 May. The S&P/ASX 300 Consumer Staples index has declined a bit less, falling 2.5% over the same period. Metcash is part of the Consumer Staples sector as it provides goods that are more essential than discretionary.
Consumer defensives (or staples) are generally considered to be less volatile and more resilient during tough economic times. Beta is used as a measure of volatility. A beta of less than one means that a stock is less volatile than the market. Metcash has a beta very close to zero which means that it shows almost no correlation to the market as a whole. This defensive quality can be helpful when constructing a portfolio during times of uncertainty.
Wholesaling of consumer goods is a low margin business. EBIT margins for FY23 were:
Food 2.1%
Liquor 2.1%
Hardware 6.5%
Food is the largest segment in terms of revenue, and hardware is the smallest. However hardware rises to the top when considering the contribution to EBIT due to the higher margins.
Source: Metcash, FY23 Full Year Results Presentation, 26/6/23
Their financial year ends 30 April, so their annual results were just released towards the end of June. The results were generally strong. Sales grew by 4.2%. Underlying EBIT increased by 8.1%, operating profit by 5.5% and reported net profit by 5.5% also. The company achieved record sales, EBIT and NPAT on the back of all divisions performing well.
Management also flagged that in the first seven weeks of FY24 they have witnessed strong sales growth and believe they are well positioned for continued…
