Convenience store retailer McColl’s has reported a sharp drop in profits, blaming the collapse of groceries wholesaler Palmer & Harvey in a “challenging” year for the group.
McColl’s said the loss of supply to 700 of its stores by the administration of Palmer & Harvey in November 2017 “created major disruption” and forced it to accelerate its new supply deal with Morrisons.
“Moving to a new wholesale supply partner, at a much faster pace than anticipated, created its own challenges and severely disrupted our plans for the launch of Safeway,” the company said.
For the financial year ended November 25, pre-tax profit declined to £7.9 million from £18.4 million the year earlier, while like-for-like sales fell 1.4%.
Total revenue, however, increased 8.1% to £1.24 billion, thanks to the acquisition of nearly 300 convenience stores in 2017.
Shares rose 9.5% to 55.4p after the company said like-for-like sales have recovered in the new year and were up 1.2% in the 11 weeks ended February 10. Total sales also increased 0.4%.
McColl’s chief executive Jonathan Miller said: “2018 was undoubtedly a challenging year, marked by supply chain disruption following Palmer & Harvey’s entry into administration and the accelerated transition to our new supply partner, Morrisons.
“Despite this disruption, we continued to make progress against a number of our key strategic plans.
“We completed the roll-out of 1,300 stores to Morrisons supply in less than nine months, which represents a considerable achievement and provides us with a more secure supply chain and a higher quality chilled and fresh offer.
“We also continued to invest in our estate, with 59 convenience store refreshes completed in the year and 11 new stores acquired.”
McColl’s expects to acquire a small number of new convenience stores and refurbish up to 30 this year.
The company continues to expect that adjusted earnings for the full year will be a “modest improvement” to the year before.
Russ Mould, investment director at fund platform AJ Bell, said that although the company is “relatively upbeat about the outlook, it won’t be an easy ride given how competitive the grocery sector remains”.
“McColl’s looks to be doing the right thing. Its net debt is coming down rapidly, it is investing in its business to keep stores looking fresh, and it is getting rid of underperforming outlets.
“Unfortunately, many of its rivals are also strengthening their proposition, meaning that 2019 is not going to be a breeze for McColl’s.
“It needs to accelerate a shift into higher margin products to give its earnings some sort of cushion if new problems emerge. At the moment its operating profit margins are wafer-thin, leaving no room for error.”