Opinion: Forget Palmer & Harvey, McColl’s P&L deserves City focus

The convenience specialist surpassed £1bn in annual sales for the first time in its history, as the acquisition of 298 stores from the Co-op boosted revenues 19.1%.

And the spike in sales filtered through to its bottom line, as pre-tax profit in the 52 weeks to November 26, 2017 advanced 3.9% to £18.4m.

Yet ongoing supply problems across its 1,600-strong store estate dented demand for its shares on Monday.

“McColl’s, like many of its grocery rivals to have been hit by the P&H administration, has acted swiftly to ease availability concerns”

Last year’s collapse of Palmer & Harvey – which occurred two days after McColl’s year-end – has sparked availability issues at about 700 of its newsagents and smaller convenience stores.

While the supply problems running up to the wholesaler’s demise did little to hamper McColl’s preliminary figures, the ongoing disruption is expected to have more of an impact in its current financial year.

McColl’s, like many of its grocery rivals to have been hit by the P&H administration, has acted swiftly to ease availability concerns.

It penned a short-term supply agreement with Nisa in a bid to keep stock on shelves in impacted shops over Christmas, while it also kicked-off its wholesale partnership with Morrisons earlier than planned.

Spooked investors

Despite those measures, the retailer warned the disruption sparked a 2.2% fall in like-for-likes during the 11 weeks to February 11, driven by a 3.6% slump at stores formerly supplied by P&H.

It is those two figures that have seemingly spooked investors.

McColl’s share price plummeted almost 9% in early trading to 224p, making it the worst performer on the FTSE All-Share index – and left the business staring at the prospect of its worst one-day fall since its 2014 IPO.

Boss Jonathan Miller said the impact on availability was “more pronounced” at the time of the P&H collapse and insisted McColl’s had largely ensured “continuity of supply” through the contingency plans it had put in place.

“[Jonathan Miller] admitted there was ’still some disruption’ to play out, particularly within chilled and fresh – two of its faster-growing categories”

Yet he admitted there was “still some disruption” to play out, particularly within chilled and fresh – two of its faster-growing categories.

Finance chief Simon Fuller added that, as a result, its 2018 financial year would be one of “two halves”.

Continued investment into its ‘Project Refresh’ programme – 100 more stores are due to be refitted by November – and the wider roll-out of the Morrisons supply deal to 1,300 stores are expected to produce a sales uptick in the second half.

That, however, didn’t stop house broker Numis trimming £4m from McColl’s pre-tax profit forecast for this year, which it downgraded to £27m.

‘Knickers in a twist’?

Numis analyst Matthew Taylor admitted the downgrade was “disappointing”, but insisted “it reflects events that are one-off and clearly outside McColl’s control.”

Jonathan Pritchard from Peel Hunt, which issued a ‘buy’ recommendation and maintained its 325p target price, said “the market has got its knickers in a twist” over the stalling sales.

While his terminology bordered on trivialising the P&H collapse, Pritchard’s sentiment is spot on.

The reaction of the City was a knee-jerk one to McColl’s short-term trading pain, but there is likely to be long-term gain.

“McColl’s is doing a good job of controlling such variables within its gift”

Customers are responding well to the Safeway brand that has been resurrected by Morrisons.

Some 400 lines are already being stocked in around 100 McColl’s stores, with plenty of headroom to grow that SKU count.

Like-for-like sales in recently acquired stores, or those converted under the ‘Project Refresh’ initiative, were up 2.4% last year.

And gross margin improved a very respectable 60 bps to 25.7% during the same period, as a result of moves to improve the product mix.

McColl’s is doing a good job of controlling such variables within its gift. Investors should look beyond its P&H problems and focus instead on its P&L prospects.