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Metro Profit Misses Estimates on Slow Holiday Spending

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Feb. 11 (Bloomberg) -- Metro AG shares fell after Germany’s largest retailer forecast annual earnings that missed analyst estimates amid a slow economic recovery in Europe and a strong euro that sapped the results of foreign expansion.

“Below-average economic growth” and foreign currency effects will hurt profit in the year through September, the owner of Galeria Kaufhof department stores said today in a statement. Earnings before interest, taxes and special items will probably be 1.75 billion euros ($2.39 billion), it said, missing the 1.79 billion-euro average estimate of analysts surveyed by Bloomberg.

Metro shares fell as much as 3.7 percent and were down 2.7 percent at 30.81 euros as of 3:25 p.m. in Frankfurt, paring the 12-month gain to about 25 percent.

“We took our estimate down based on foreign exchange headwinds,” said Raghav Gupta-Chaudhary, an analyst at Nomura Securities in London. “The other thing is the evolution of the consumer electronics business” and Metro’s relatively late entry to online sales, Gupta-Chaudhary said.

The retailer, which also owns Media Markt electronics shops, is expanding eastward in Russia, Eastern Europe and China, and increasing e-commerce sales to counteract weak consumer spending in Europe and a stronger euro, which has the effect of reducing overseas sales converted into the Dusseldorf-based company’s home currency.

‘Little Evidence’

Metro is showing “little evidence of any fundamental turnaround,” James Collins, an analyst at Deutsche Bank AG in London, said in a Feb. 3 research note. “Foreign exchange rates have moved against Metro significantly in recent weeks, particularly in its most profitable market, Russia,” said Collins, who recommends holding the shares.

Metro’s forecast came as it reported earnings for the three months through December that missed analysts’ estimates amid weak Christmas sales.

Earnings before interest, taxes and special items dropped 16 percent to 1.07 billion euros in the fiscal first quarter from a year earlier, missing the average 1.08 billion-euro estimate of analysts surveyed by Bloomberg.

Metro said on Jan. 20 that it plans to proceed with a partial initial public offering of its Russian Cash & Carry business, which supplies other businesses with goods. The Russian ruble has fallen about 5 percent against the euro this year.

Russia Listing

Plans to list about a quarter of the Russian cash and carry business are “the biggest story for the company” right now, Nomura’s Gupta-Chaudhary said in a Feb. 5 research note. That portion of the business could be worth 7 billion euros, he said.

“There’s better performance from cash and carry and we look at this positively,” the analyst, who recommends buying the shares, said today. “It’s basically in line with their December guidance.”

The company said in December it expected a “slight rise” in sales this year, with earnings “markedly up.” Today’s report confirmed preliminary sales figures released on Jan. 13 that showed first-quarter revenue fell 3.3 percent to 18.7 billion euros.

Kaufhof is a primary concern following a slow Christmas season as mild weather in Europe restrained winter clothing sales, Chief Executive Officer Olaf Koch said on a conference call with analysts today. He sees “extreme” favorable chances of online growth at the unit.

Metro continues to target growth in Russia, and is more broadly modernizing its online delivery systems, the CEO said.

Metro said today that it plans to strictly manage costs. The retailer last year made a change to its fiscal year, so it will end on Sept. 30 this year.

To contact the reporter on this story: Aaron Ricadela in San Francisco at aricadela@bloomberg.net

To contact the editor responsible for this story: Celeste Perri at cperri@bloomberg.net