Convenience store chain McColl’s Retail Group PLC (LON:MCLS) (MCLS.L) has recorded a share price fall of over 25% today after it released a profit warning.
The company has experienced a challenging 12-month period, with the collapse of supplier Palmer & Harvey causing a significant amount of disruption. It has therefore had to accelerate the rollout of Morrisons’ supply to 1,300 of its stores. The speed at which this has taken place has caused some disruption to its plans for the launch of Safeway.
Alongside this, McColl’s has recorded a stronger-than-expected performance in tobacco. This means that there has been a lower conversion of sales to profit, with adjusted EBITDA for 2018 now due to be around £35 million. It also faces cost pressure in the short run. An increase in the National Living Wage could cause margins to be squeezed yet further at a time when consumer confidence is expected to remain weak.
In response, the company is focusing on becoming more efficient, with an investment in systems and processes expected to take place. It is also continuing with its estate optimisation programme, with 66 under-performing smaller convenience stores removed during the year. It has also made progress in reducing net debt.
Looking ahead to next year, McColl’s expects only a modest improvement in adjusted EBITDA versus the 2018 figure. As a result, I wouldn’t be surprised if the company’s share price falls further in the near term, with it seeming to face a period of difficulty which could last for a number of months.
In the long run, there could be turnaround potential in my opinion. I feel that the company has the right strategy, but is being hurt by external challenges that could persist. As a result, I’d rather wait for more updates from the business before becoming more optimistic about its investment potential.