Metro Sees 2012 Earnings Hit By Europe's Economic Woes

03/20/2012| 10:31am US/Eastern

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  By Neetha Mahadevan 
  Of  
 

German retailer Metro AG (>> METRO AG) Tuesday warned that earnings and sales this year will be hit by a sluggish European economy and stagnant prices, after the company posted weak results for 2011.

The company said sales should be higher than last year, but it expects earnings before interest and taxes --and adjusted to exclude one-off items -- to be flat.

Adjusted Ebit fell 1.8% to EUR2.37 billion in 2011, largely in line with expectations. Net profit dropped 26% to EUR631 million from EUR850 million the year before, missing analysts' estimates of EUR865 million.

The sovereign debt crisis, high unemployment rates and austerity programs in many European countries were to blame as they pinched customers' willingness to spend money in 2011, the company said. Disappointing Christmas business and currency fluctuations also hurt sales. While German economic growth was strong in 2011, it faced a slowdown towards the end of the year.

"The macroeconomic conditions in many countries have worsened noticeably compared to 2010," Chief Executive Olaf Koch said in a statement.

Metro is not alone. Other large retailers like Carrefour SA (>> CARREFOUR) in France and Tesco PLC (TSCDY) in the U.K. are in similar trouble, especially on non-food business. Both companies have recently, like Metro, shuffled their management in the face of challenges in the sector.

Koch took over from Eckhard Cordes in January after Cordes said he no longer wished to extend his contract. Together with Cordes, Koch, previously financial chief, had pushed through the comprehensive savings program, which entailed the loss of thousands of jobs.

The Dusseldorf-based company, whose portfolio includes wholesale cash-and-carry stores, hypermarkets, and electronics stores across 33 countries, is at the tail-end of a wide-ranging restructuring, started three years ago aimed at cutting costs and securing long-term profitability.

Although Metro saw earnings slip in its electronics business Media-Markt Saturn, analysts said it wasn't as bad as expected. Like-for-like sales at its division fell 4.3%, while adjusted EBIT declined by EUR83 million to EUR542 million. Overall sales fell 0.8% in 2011 to EUR66.7 billion.

"I had feared a stronger drop from the electronics business," Mark Josefson, an analyst with Silvia Quandt, said. Still, Media-Markt Saturn's entry into online business is hurting the company's margins and this could continue for a while, he added. Metro is pushing to expand its online presence, which involves costly investment.

Despite the lack of good news, Metro led the DAX gainers Tuesday, trading up 1.5% at EUR31.34, while the overall blue-chip DAX index was down 1.4% at 1230 GMT. Investors are setting their sights on a brighter future as a result of the restructuring, analysts said.

"We see share price potential above all due to the expectation that the focus will increasingly turn to the potential the company can achieve from restructuring," Manfred Jaisfeld at National Bank said, adding that further cost-cutting and productivity measures are likely.

Although the company suspended the sale of its Kaufhof department stores due to poor market conditions in January, an eventual sale remains likely. A sale of its hypermarket chain Real also remains possible, although Metro is still giving it time to meet its targets, the company said.

-By Neetha Mahadevan, Dow Jones Newswires; +49 69 2972 5507; neetha.mahadevan@dowjones.com

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