McColl’s (LON:MCLS) is one of the UK’s leading neighbourhood retailers, with a growing estate of over 1,600 managed convenience stores (80%) and newsagents (20%). The term “neighbourhood” refers to residential locations, for example villages or housing estates, which tend to mean a loyal customer base and little immediate local competition. This positioning puts McColl’s (LON:MCLS) in the sweetspot of small box retailing, riding the growing social dynamic towards “little and often” shopping. The company has compelling drivers for growth in earnings and cash-flow in the next few years, which we outline in this report.
In August 2017 McColl’s announced a supply chain partnership with Morrisons (MRW.L). McColl’s has maintained a strategy of using 3rd party supply and logistics, reducing demand on the company’s own capex and working capital, benefitting the company’s cash-flow (chart p2). The Morrisons deal further underpins this strategy, and also allows McColl’s to expand its fresh food offering.
As part of the deal McColl’s obtains the right to sell groceries under the Safeway brand. McColl’s has historically under-indexed in own-brand products, and the adoption of Safeway as McColl’s house brand addresses this using a name already well-known to UK consumers.
Full-year benefit from the acquisition of 298 stores from Co-Op. Potential other expansion of the estate, likely to be individual store acquisitions. The “Refresh” program of store upgrades will be applied to around 100 stores in 2018 and more than 100 in 2019. Ongoing positive mix shift towards groceries, alcohol, and food-to-go, versus lower margin tobacco and newspapers, reinforced by the phased roll-out of the Safeway brand during 2018. The food-to-go offering is likely to benefit from further in-store Subway franchises, which have proved very popular.
The shares gained 42% during 2017 reflecting the progress of the business. However, we believe these gains may be only the first steps towards a market reappraisal of McColls, with earnings growth prospects in 2018 and 2019 driving further potential upside.