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Metro AG Earnings Decline as Debt Crisis Damps Spending

Metro AG, Germany’s biggest retailer, said it’s ready for the Christmas season and “positive” on the outlook for the fourth quarter, boosting the shares after third-quarter earnings missed estimates.

The owner of Cash & Carry wholesale outlets and Kaufhof department stores is “well prepared” for the holiday, particularly in its home market, Chief Executive Officer Olaf Koch said on a call with analysts today. Inventory levels for the holiday are “healthy,” he said.

The CEO spoke after Metro reported a 35 percent drop in third-quarter earnings before interest and taxes to 398 million euros ($513 million), excluding special items. That missed the 415.3 million-euro average estimate of 14 analysts compiled by Bloomberg, dealing a further blow to the Dusseldorf-based company, which this month lowered its 2012 profit forecast to about 2 billion euros. Metro cited the weakening economic climate in southern Europe and parts of eastern Europe.

“Against this background, management sounds remarkably upbeat,” Caroline Gulliver, an analyst at Espirito Santo in London, said in a research note today.

An improvement in profit margins is “feasible” in the fourth quarter amid better signs in both the food and non-food areas, Chief Financial Officer Mark Frese said on the call.

Metro shares gained as much as 2.6 percent and were up 2.4 percent at 21.94 euros at 11:25 a.m. in Frankfurt. They have still slumped 22 percent this year, causing the stock to leave Germany’s benchmark DAX index last month.

‘Painful Combination’

Koch is focusing on Cash & Carry and the Media-Saturn consumer-electronics unit, while cutting investment in Kaufhof stores and Real grocery outlets, both of which he has said he may sell. Metro gets almost half its revenue from the wholesale division and about a third from electronics.

“A softening of the consumer environment at a time when the group is reinvesting to drive growth in both Cash & Carry and consumer electronics has been a painful combination,” James Grzinic, an analyst at Jefferies International, said in a note.

Koch said on the call that Metro will explore all options for Real’s operations in eastern Europe. Metro is in advanced talks with two companies, including French retailer Auchan, to sell the unit’s non-German operations, two people familiar with the negotiations said in August.

A sale is “not the only option,” the CEO said today.

Lower Property Gains

Third-quarter Ebit at Media-Saturn slumped to 73 million euros, before special items, from 141 million euros a year earlier as the retailer cut prices, Metro said today. Earnings at Cash & Carry, Metro’s biggest unit, fell 14 percent to 237 million euros, the company said.

About half of the decline in earnings was attributable to “significantly lower income” from property sales, it said.

To meet its reduced full-year profit target, Metro needs to match last year’s fourth quarter, according to Mark Josefson, an analyst at Silvia Quandt Research GmbH in Frankfurt. “It’s possible because the fourth quarter last year was very weak, but the market environment is not much better today,” he said.

Net income in the quarter fell to 77 million euros from 190 million euros a year earlier, even as sales increased 0.6 percent to 15.9 billion euros. Revenue rose 2 percent adjusted for the disposal of the Makro U.K. unit, the company said.

Sales in Germany, where Metro gets almost 40 percent of revenue, dropped 2 percent to 5.9 billion euros in the quarter. In western Europe, excluding Germany, revenue declined 5.4 percent. Euro-area consumer confidence remained little changed in October after decreasing in the previous four months.

Metro agreed to sell its Makro U.K. wholesale unit to Booker Group Plc in May to concentrate on its main businesses. The retailer also sold a fund that owns 20 wholesale stores in Italy to W.P. Carey & Co. in September.

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