October 30, 2018 / 7:44 AM / in a month

UPDATE 3-Spain's DIA supermarkets to rein in spending and focus on home market

* Core profit down 24 pct in first nine months of the year

* Aims to keep 2019 capex below 200 mln euros

* Investment focus on DIA&Go and la Plaza formats

* Net debt rises to 1.4 bln euros (Adds CEO pledge to restructure debt, updates shares)

By Isla Binnie and Emma Pinedo

MADRID, Oct 30 (Reuters) - Struggling Spanish supermarket chain DIA will cut spending and sharpen its focus on its domestic market, it said on Tuesday after reporting a 24 percent plunge in nine-month core profit.

The low-cost retailer has failed to find a strategy to stem a steady erosion of market share in Spain over the past five years as the country’s economic recovery softened the edge it enjoyed with bargain-hungry customers during recession.

It is now also struggling with inflation in Argentina, which accounts for about 15 percent of group sales, and also said it was working to restructure its debt which was thrown into the spotlight by ratings downgrades last week from Moody’s and Standard & Poor’s.

DIA reiterated revised guidance for full-year adjusted core earnings of between 350 million and 400 million euros ($398 million to $455 million) issued two weeks ago with its third profit warning in a year. That estimate did not include the potential impact of hyperinflation in Argentina.

German discounter Lidl and Spanish rival Mercadona have stolen a march on DIA, investing heavily in their stores.

DIA boosted investment in the first nine months of the year by 71 percent and says it expects total capital expenditure for the year to reach about 350 million euros, but will keep it below 200 million euros in 2019.

Spending will return to 3.5-4 percent of sales, which the company expects to rise by mid-single digits, between 2020 and 2023.

“We will be much more disciplined with each euro that we invest,” Chief Executive Antonio Coto, a company veteran who took the top job in August, said in a statement.

Adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) for the nine months to Sept. 30 fell to 281.1 million euros from 370.2 million euros in the same period last year.

SPANISH FOCUS

However, DIA reported a 2.7 percent increase in like-for-like sales, with growth of more than 20 percent for its smaller urban format, DIA&GO, and 8 percent for its la Plaza brand, which Coto identified as key areas for the group’s investments.

Coto, whose appointment was greeted with a surge in DIA’s share price, said turnaround efforts would focus on Spain.

DIA’s debt rose to 1.42 billion euros from 1.14 billion euros last September.

Coto said on a conference call that he was working on restructuring the debt, which is now equivalent to more than three times core earnings, perilously close to the limit of 3.5 times which is a condition of the company’s bank loans.

“At the next covenant date, that is going to be the closing of next year, we will have renegotiated everything, and it is my commitment not to breach any covenant in the future,” he said.

Coto also said he wanted to “explore strategic options” for DIA’s Clarel cleaning and cosmetics operation, indicating he could consider a sale.

DIA’s heavily shorted stock has plunged this year to historic lows, knocking more than 80 percent off the company’s market value since January.

The shares slipped fractionally to 0.74 euros on Tuesday after the results.

DIA’s biggest shareholder, an investment fund owned by Russian tycoon Mikhail Fridman’s LetterOne, prompted speculation about a possible takeover when it disclosed last month that it owned 29 percent of the company, just under the 30 percent threshold that would trigger a full buyout. (Reporting by Isla Binnie and Emma Pinedo Editing by David Goodman and Susan Fenton)

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