McColl’s (MCLS) plans to continue its acquisitive push in the convenience grocery sector, despite having only received regulatory approval for its buyout of almost 300 Co-op stores in the weeks before Christmas.
CEO Jonathan Miller said 2016 had been a “pivotal” year for the retailer, as it “completed our journey to become first and foremost a convenience business” by finishing the year with more than 1,000 convenience stores.
A total of 58 new convenience stores were acquired during the year and 59 newsagents were converted into food and wine-focussed stores.
The first of the 298 Co-op stores opened after year-end on 31 January in Canvey Island, with more than 20 stores currently trading as McColl’s and the integration of the rest of the store “on track”.
Despite the “transformative” Co-op acquisition, Miller said McColl’s would continue to grow its estate through acquisitions and that the balance of acquisitions and conversions would move in favour of the former.
“We have been converting from a newsagent business to convenience-based business for a long time now and we are probably getting towards the end of being able to convert newsagents to convenience stores,” he said.
“Once we’ve taken on board the Co-op stores, we’ll return to making independent store acquisitions in much the same way we have done historically.”
He said the strategic focus in the first half of the year would be integrating the remainder of the Co-op stores into the group.
But he added that the ongoing shift to grocery-focussed stores would enable the group to continue to improve its like-for-like sales performance.
Revenues at the group in the year to 27 November 2016 increased 1.9% to £950.4m – the sixth consecutive year of growth.
However, like-for-like sales continued to decline, down 1.9% in the year, with its newsagents and standard convenience stores down 3.3% and the premium convenience and food and wine stores down 1%.
Current trading in the first quarter of 2017 continued to show improvement as total revenue grew 2.1%. Like-for-like sales in the 13 weeks to 26 February fell 1.3%, but this represented the fourth consecutive quarter of improvement.
“We can now turn our attention to our existing convenience store estate and focus on opportunities to improve performance,” Miller said.
CFO Simon Fuller added that the Co-op stores deal meant newsagent stores would only represent around 20% of the group’s stores having been close to half five years ago - a process helped by its disposal programme for its lowest-margin newsagents enacted in 2015.
“Even our existing convenience stores still sell significant volumes of older, traditional products like tobacco, so we’re looking to evolve the category mix to sell a great proportion of newer, future-focussed products, like food-to-go,” he said.
This shift to higher margin products helped gross margin increased by 70 basis points to 25.1% during the year.
Adjusted EBITDA slipped £1m to £36.7m despite the fatter margins on the back of cost pressures and £500k incurred in advance of the Co-op integration.
Pre-tax profits fell from £21.1m in 2015 to £17.7m after the group was hit with £3.1m of exceptional costs related to the exit from legacy properties, asset write-offs and the Co-op deal.
Miller described this as a “good performance in a competitive sector”, noting the advent of the national living wage had hit profitability across the industry.
Broker Liberum commented: “The extension of the convenience store estate, shifting into higher margin, higher growth products and rolling out services continues. This improving proposition is resonating well, as McColl’s grows its sector share and builds its neighbourhood presence and loyal, customer base.”
McColl’s shares are up 0.6% today to 178p and have risen by 25% over the past twelve months.