Leading convenience retailer McColl's (MCLS) recent rally continues, the shares bid up 2p to 168p on a third quarter update highlighting 'solid' trading and continued expansion to capture market share.

Yet Shares is sticking with our cautious stance on the neighbourhood retailer, since the patchy update demonstrates a business feeling the pinch from the ferocious supermarkets price war.

Click here to read the update from the Brentwood-headquartered retailer, which trades under the McColl's convenience and Martin's newsagent brands. Whilst total sales grew 1.8% for the 13 weeks to 28 August, like-for-like sales were down 1.8% in the quarter and are now 2% down year-to-date.

McColl's store front 1

McColl's is finding it tough to eke out organic top-line gains as Tesco (TSCO), Wal-Mart's (WMT:NYSE) UK arm ASDA, Morrisons (MRW) and Sainsbury's (SBRY) slug it out with German hard discounters Aldi and Lidl on price.

Like-for-likes held up better in food and wine and premium convenience stores, off by 1.2%, than in McColl's standard convenience stores and newsagents, where same-store revenues reversed by an alarming 3.7%, the news category in particular facing structural decline. Indeed, given price deflation in key categories, McColl's did well to grow taxable profits 8.1% to £8.2 million in the half-year to 29 May.

CEO Jonathan Miller says '2016 continues to be a year of significant progress in delivering our convenience strategy. This was particularly demonstrated by our transformational acquisition of 298 convenience stores from the Co-op announced on 13 July 2016. We are making good progress with the approvals and our preparations ahead of the transition of these stores during 2017.'

Miller insists McColl's is on track to meet full-year forecasts, though given subdued trading trends, Shares reckons there's a clearly a risk of further downgrades. Having acquired 36 new convenience stores, McColl's closed the quarter with 953 convenience stores and 417 newsagents, giving Miller confidence it will achieve its target of 1,000 convenience stores by the end of the calendar year.

Web chart - MCCOLL'S - Sept 16

He sees the £117 million Co-op stores takeover, still subject to competition clearance, as a pivotal moment for the business. The extra stores will help it accelerate growth in convenience and increase its neighbourhood presence, representing a strong strategic fit in terms of size, location and demographics. The Co-op deal will also provide a larger, more credible chilled and fresh business and significantly improve McColl's scale and buying power.

McColl's, with eight Subway franchises and 183 Amazon lockers across its estate, the latter giving local communities a greater range of services, is also the UK's largest Post Office operator. It opened its 550th Post Office in Q3; the overwhelmingly majority of these Post Offices have been modernised and operate with longer opening hours.

Issue Date: 01 Sep 2016