Morrison (Wm) Supermarkets (MRW) Ordinary 10p
HL comment (14 March 2018)
Morrison's continued strong cash flows have helped debt fall to £973m, and the group announced a full year ordinary dividend of 6.09p per share (up 12.2%) and a special dividend of 4p with full year results.
In the 53 weeks to 4 February 2018, like-for-like (LFL) sales excluding fuel rose 2.8%, with the wholesale business contributing 0.5% and the retail business 2.3%. However, Q4 LFL retail sales growth was 2%, less than any other quarter.
The shares fell slightly on the news.
CEO David Potts' plans for Morrison make perfect sense; focus on the consumer, reinvest in pricing and improve the stores' appeal.
We're impressed with progress so far. Customers are coming back and like-for-like sales are firmly back in positive territory. However, this is far from the end of the journey.
Potts has a vision of a 'new Morrisons', which includes several capital-light wholesale agreements. Deals have been signed to roll out convenience stores on petrol forecourts in partnership with Rontec, supply Amazon Fresh with groceries and revive the Safeway brand through a deal with McColl's. The group is targeting annual wholesale sales in excess of £700m by the end of 2018, and more than £1bn in due course. Profits should be in the £75-£125m region.
With the majority of stores owned rather than leased, the group already has strong cash flows, which help support the dividend. The shares currently offer a prospective yield of 3%, and analysts expect the payout to rise over the coming years.
However, potential investors should remember that there are still a few weak spots in the business. Most notably, Morrison lacks a convenience footprint of any scale and its online offering relies on a partnership with Ocado.
Furthermore, conditions in the sector are not supportive. An increasingly price-sensitive customer has led to fierce competition, squeezing margins across the board. Inflation is still above wage growth too, but there's at least now signs this may reverse.
Nonetheless, we feel David Potts is steering the ship in the right direction. A focus on value and service is clearly appealing to customers and a healthy balance sheet gives the company room for manoeuvre.
Full year results details
Group revenue rose 5.8% to £17.3bn, with positive in-store results, higher fuel sales and the benefit of a 53 week financial year more than offsetting the 0.3 percentage point headwind from a smaller store estate.
Despite the extra week, operating profit fell 2.1% to £458m, with import cost inflation and higher admin costs impacting margins. However, with the benefit of lower finance costs (which include interest payments on debt) pre-tax profit rose 16.9% to £380m.
Free cash flow was £350m, which included a £35m improvement in operating working capital and £108m of disposal proceeds. Morrison expects to continue generating strong cash flows in the year ahead, with debts set to keep falling.
In-store, transaction numbers remain positive, rising 2.9% over the year, but those customers are buying 4.9% fewer items per visit. Customer satisfaction is rising and the group is around half-way through its Fresh Look programme. Ranges in areas such as 'Best', 'Free From' and 'Nutmeg' clothing are growing.
In January, the group started rolling-out its McColl's wholesale supply nationwide, including the reintroduction of the Safeway brand. Customers' initial reaction is said to have been good.
Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
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