Metro Group, the world’s fourth-largest retailer, hailed “record” earnings for 2010 when it delivered its full-year results earlier this week. However, the group’s share price dipped following the announcement as the company’s 2010 performace and plans for international expansion in 2011 failed to excite investors. Katy Humphries reports.

On paper, German retail giant Metro Group posted some impressive results for 2010 earlier this week.

Metro, the world’s fourth-largest retailer, booked a 19% rise in EBIT, which rose to EUR2.4bn (US$3.4bn). Net profit more than doubled to EUR850m from EUR383m in 2009 and the group boosted EPS to EUR1.35 a share, up from EUR1.18 last year.

The improved profitability was the consequence of higher sales and strengthening margins, Metro said.

Sales were up in most markets, climbing a respectable 2.6% overall, although they remained flat in Germany where the company generates around 40% of its revenue. The company said gains were led by its Asia/Africa division, where sales rose 12.9% to EUR2.7bn.

Margins improved in all of its formats and the group sucessfully turned around its loss making units, like the Real supermarket chain and Kaufhof department stores.

Meanwhile, earnings at Metro’s Real hypermarkets more than doubled in 2010, and management suggested that the chain might have a long-term future within the group, having previously revealed that the company was mulling selling-off the chain.

Speaking during a conference call, Metro chief executive Eckhard Cordes said Real’s German business is not a “definite candidate for disposal any longer”. Among “many options” under consideration, he suggested Metro may keep the format if profitability continues to improve. Meanwhile, with a margin of 3.9% of sales, Kaufhof was Metro’s most profitable unit last year and the company was not “in a hurry” to dispose of the business, Cordes added.

Moreover, Metro’s “Shape 2012” cost-cutting programme contributed in the region of EUR527m to earnings, Metro said.

So far so good? Apparently not. Metro’s shares dropped almost 5% after the results were released on Tuesday (22 March), closing at EUR47.7 as the market reacted unfavourably to the retailer’s guidance for the coming year and plans to expand its store footprint in rapidly developing markets. Over the last three months, Metro’s stock has dropped in value by approximtely 12%.

Looking to the next 12 months, Metro said that it expects sales growth to accelerate compared to 2010 to around 4% in 2011. This compares with its medium-term target of 6%. The company added that anticipates a 10% increase in earnings during the period.

However, RBS analyst Justin Scarborough tells just-food that this “unsurprising” guidance failed to meet expectations, while EBIT growth – excluding property gains – missed consensus expectations of 15%. “Upgrades were needed given its valuation,” he says.

Metro’s share price has been boosted by optimism over the company’s Shape 2012 restructuring plan and signs of economic recovery in its main developing markets in eastern Europe. Metro shares currently command a premuim when compared to its peer group, trading at 14.5 times earnings compared to a sector average of 12.1 times. However, the company’s performance fails to justify this higher price, Scarborough suggests.

“Even if we aligned our medium term sales and EBIT growth rates with that of the group, we would still only generate a target price of EUR54, which would offer less than 10% upside to the current share price,” he explains.

Elsewhere, Bernstein analyst Christopher Hogbin says that the steady decline Metro has witnessed in its share price is increasing its attractiveness as an investment prospect.

“Metro at 9.7 times projected earnings 2012 is becoming more attractively valued,” he writes in a note to investors. However, he adds: “We see limited near-term catalysts.”

During the coming year, Metro said that it intends to drive sales growth by increasing its capital expenditure to EUR2.2bn, up from EUR1.7bn invested during the previous fiscal year. The retailer indicated that it would ramp up expansion in the key markets of China, India and Russia. Metro intends to open more than 110 new outlets and it will focus expansion efforts on its cash-and-carry and MediaMarkt-Saturn electricals businesses. The group also indicated that it would increase investment behind its MMS internet business. The group also revealed plans to expand into Indonesia in 2012.

However, while the company said that it was optimistic that these investments would pay dividends, Cordes also sounded a note of warning on the company’s outlook.

Speaking during a conference held in Dusseldorf, Cordes suggested that there are a number of risk factors that could have a negative impact on the company’s results. He warned that the presumed rate of economic growth upon which Metro’s forecasts depend may be dented by the Japanese earthquake and political unrest in the Middle East. Cordes also conceeded that concerns over the strength of the euro could have a significant impact on the company’s result and revealed that although trading in the first quarter “started out well” sales have slipped in February as concerns over the global economy and rising fuel prices hit.

“Nobody can say how big the impact of the Japan disaster, the unrest in the Middle East and the weakness of some southern European countries will be on the global economy,” Cordes said.

In the face of an uncertain macroeconomic environment and political instability in key markets, Metro has bet its chips on a strategy that sees it continuing to drive through productivity savings – with Shape 2012 on target to meet EUR700m improvement in profit by 2012 – while also ramping up investment in expansion. This, management hopes, should be enough to steer Metro through the trying times that are currently facing the global economy.