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Metro sees profit hit as fights to revive cash and carries

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(Globalpost/GlobalPost)

By Victoria Bryan

DUESSELDORF, Germany (Reuters) - German retailer Metro <MEOG.DE> predicted operating earnings would fall in the coming months, hit by weak consumer spending, a lack of major sporting events and investments aimed at reviving its main cash and carry business.

Shares in the company, which also runs consumer electronics stores, hypermarkets and department stores, dropped as much as 3 percent on Wednesday, at times the biggest decline by a European blue-chip stock <.FTEU3>.

Store groups across Europe are battling to cope with a prolonged squeeze on consumer incomes as governments try to reduce their deficits. France's Carrefour <CARR.PA>, for example, is handing more power to store managers, while Britain's Tesco <TSCO.L> is cutting prices and upgrading stores.

Metro's cash and carry business, which accounts for almost half of sales and 40 percent of earnings, has been hit particularly hard by the impact of economic weakness on its core customers in the independent retail and hospitality industries.

Earlier this week, chief executive Olaf Koch took over the running of the division, which accounts for almost half of sales and 40 percent of earnings, a move analysts said showed how much pressure there was to improve its performance.

"A new era at Metro could maybe start via the impetus provided by Olaf Koch now heading the Cash and Carry and Hypermarket businesses," Credit Suisse analysts wrote in a note.

Metro, which runs over 2,200 outlets in 32 countries but gets just over two-thirds of sales from Germany and other western European countries, has been cutting prices at its cash and carries, as well as revamping product ranges and investing in its delivery arm in a bid to reverse a decline in earnings.

Koch said the cost of the revamp would continue to depress earnings at the unit in the first nine months of 2013 - a shortened fiscal year as the group changes its reporting period.

"We are not happy with the development of earnings, but are convinced we can get back to our old earnings power," he told journalists. Cash and carry earnings dropped 15 percent in 2012.

The group identified eastern European and Asian countries like Turkey, Russia and China as places where it will seek to open new cash and carry stores, due to stronger economies there.

It also said its consumer electronics business Media Markt Saturn would be held back by a lack of major sporting events compared with 2012, when the Olympic Games and European soccer finals boosted sales of televisions.

"Overall, the guidance would imply that the earnings scenario looks poorer than expected," Commerzbank analysts wrote in a research note.

DIVIDEND WORRIES

In an unscheduled statement earlier this month, Metro reported operating profit dropped 16 percent to 1.98 billion euros last year and cut its dividend for the first time in over 14 years.

The dividend cut hurt its largest shareholder, the Haniel group, which has recently sold a stake of around 4 percent in Metro in a bid to reduce its debts.

A big payout for the shortened fiscal year looks unlikely.

"We intend to continue to distribute a competitive and attractive dividend," the group said in its annual report.

"But Metro generates a large share of its earnings in the final quarter of the calendar year. This all-important quarter will not be included in the short financial year 2013."

Metro is changing its reporting period to start its fiscal year on October 1. That means its first quarter will include the Christmas trading period, in which it makes most of its profit, making it easier to give an outlook for the financial year.

The company did not say on Wednesday by how much it expected operating earnings to fall in the first nine months of 2013.

But it added that earnings before interest and tax, excluding special items, would improve from 704 million euros (598.5 million pounds) in the comparable period thanks to gains from an expected property transaction in France.

Despite the spending on its cash and carry business, Metro said it would reduce overall investment in the shortened 2013 year to below the 954 million euros it invested in the first nine months of 2012.

At 1320 GMT Metro shares, which last year dropped out of Germany's index of 30 leading companies, were down 1 percent at 22.72 euros.

($1 = 0.7760 euros)

(Additional reporting by Maria Sheahan; Editing by Ludwig Burger and Mark Potter)

http://www.globalpost.com/dispatch/news/thomson-reuters/130320/metro-sees-profit-hit-fights-revive-cash-and-carries