Metro update: Bad, but may be not so bad at all ?
A quick update on the Metro case. This is how I ended the Metro post from a few days ago:
For me, it is currently too early to do something. It is not clear to me if the stock price has overreacted or if more trouble is coming along especially from Russia.
Selling now would be clearly an uninformed decision as well as buying more. The next step will be the release of the 6M report next week. I think I will then still wait and see how Russia develops. If, for instance there would be a further profit warning because of Russia, then this would be a clear sell signal.
So let’s quickly check out the half-year report.
- Real, the German Supermarket chain is doing batter than last year. However the improvement in Q2 was smaller than in Q1 and might have been aided by early Easter holidays
- Delivery & Real Online do well, but are small
- Asia stable despite negative FX impact
- Metro Germany is still losing money
- Eastern Europe less profitable despite good growth
- FCF Q2 lower by -130 mn (reason given: Store openings)
- Restructuring charges at Real of up to -40 mn EUR (over 2 years if I understood correctly)
- EBITDA in Russia in Q2 dropped -50%, Like for like sales by almost -9%
Russia / Metro’s competition
For Metro, Like-for-like (Lfl) sales were -8,9% which is clearly “Super bad”. However also some competitors seem to have problem. Magnit for instance still showed top line growth but Lfl decreases:
Krasnodar, Russia (April 20, 2018): Magnit PJSC, one of Russia’s leading retailers (MOEX and LSE: MGNT) announces its unaudited 1Q 2018 results prepared in accordance with IFRS.
During 1Q 2018 Magnit added (net) 275 stores. The total store base as of March 31, 2018reached 16,625 stores (12,283 convenience stores, 242 hypermarkets, 210 “Magnit Family” stores and 3,890 drogerie stores). Selling space increased by 13.24% in comparison to 1Q 2017 from 5.15 million sq. m. to 5.83 million sq. m.
Revenue increased by 8.08% from 266.98 billion RUR in 1Q 2017 to 288.56 billion RUR in 1Q 2018.
This looks like -5% Lfl sales at Magnit although they do not report the number explicitly. This clearly does not make Metro’s number any better but I think it explains the context that it is maybe not a Metro individual problem.
Lenta, another competitor actually did a little bit better:
1Q 2018 Operating Highlights:
Total sales grew 19.9% in 1Q 2018 to Rub 93.4bn (1Q 2017: Rub 77.9bn);
Like-for-like (“LFL”) sales growth of 6.1% vs. 1Q 2017;
LFL traffic growth of 0.6% combined with a 5.5% increase in LFL ticket;
One new hypermarket and nine new supermarkets opened during the first
quarter of 2018;
Total store count reached 338 stores as at 31 March 2018, comprising 232
hypermarkets and 106 supermarkets;
Total selling space increased to 1,392,973 sq.m as at 31 March 2018
(+19.3% vs. 31 March 2017); and
Interestingly Lenta’s numbers don’t make that much sense: They added 19,3% floor space, increased sales by 19,9% and claim +6,1% LfL sales increase.
Some readers claimed that I should not compare additional floor space in the quarter with the increase in sales. I am aware that this is a simplification. The better metric would be to use the increase in floor space 1 year ago to adjust for the treatment of new stores. On that basis, Lenta actually looks (much) worse. Lenta increased floorspace at a rate of +30% a year ago which then translated into 20% sales increase a year later. This shows even more that Lenta’s Lfl numbers seem to be comletely bogus and that their LfL should rather be -10%.
Another of the big Russian retailers, Dixy Group had already very weak results in Q4 2017:
4Q 2017 Operational Highlights:
o Revenue amounted to 73 billion RUB, demonstrating -7% yoy;
o LFL sales declined by 7.9%;
o 6 new stores opened and 7 stores closed.
Market leader X5 finally claims to have flat LfL sales in Q1 with a top line growth of 20%, but similar to lenta the numbers don’t really add up at selling space increased by 26%.
What’s clear is that the large Russian competitors of Metro added floor space like crazy over the last 12 months and I guess that this, combined with weaker than expected GDP growth then led to the observed waek Lfl numbers.
Looking at the stock chart we can see that for instance Magnit also suffered with its stock price along side Metro:
So one of my worst case scenarios from last time might (hopefully) not be the reason for Metro’s problems:
- Metro is active in Russia & Turkey. These are countries where irregularities are rather common –> is the bad outlook in Russia maybe related to a fraud case ?
Again, this doesn’t make Metro’s numbers better but for me it supports my decision to hold the shares as it doesn’t look like a pure individual problem of Metro.
I am clearly not a macro expert, but I do think if Oil prices stay where they are, this is not bad for the Russian economy and maybe we will see some recovery later in the year.
Olaf Koch, the CEO bought shares last week in a value of 1 mn EUR. For a guy who earned 1.9 mn gross (and maybe 1 mn net) last year, this is quite a statement. However he also bought shares for 1 mn in July last year, so his timing capabilities are not perfect.
In any case it is a good signal but it should not be overestimated.
Behavioural aspects – is this just regret aversion
In my last post, some people commented that not selling might be a form of “regret aversion”, which means that one is not acting although one should because of the fear that the decision will turn out to be wrong.
As a first defense I would argue that writing already the second post on my “Hold” decision clearly shows that I didn’t make it too easy for myself.
I think that I am very well aware that not selling in this case is an active decision. Actually writing these posts is for me an important exercise in order to avoid specifically these kind of biases. I think also the track record on this blog shows that I have no problems selling a losing position when I think that the situation has deteriorated so much that a recovery is not very likely (Silver Chef).
Of course I could be totally wrong and Metro will do very poorly going forward, but this is a risk I am currently actively prepared to take.
As mentioned last time, I do think that for me selling Metro now doesn’t make sense. Clearly; i have underestimated the issues in Russia and I should have done more research into the competitors at an earlier stage. However it looks like that this is not solely a Metro problem but a market wide problem, which at least for me is a big difference.
There is no guarantee that Metro will make its reduced forecast and clearly there are other issues, but for me, at the current valuation risk vs. potential return looks pretty attractive.