Morrison's third quarter like-for-like (LFL) sales have come in at -2.6%, reflecting a small improvement over recent quarters. The underlying trend is perhaps more positive, for MRW are reducing vouchering, which took 2.4% off the LFL number, whilst deflation was 2.2%. The shares fell by 1-2% in early morning trading.
So volumes appear to be stabilising, with the company taking action to try and bolster the margin squeeze. But competitive conditions are still tough, with deflation amounting to 5.3% over two years.
The group is focusing back onto the core, as shown by the recent closure of 11 underperforming stores and the sale of the 140 convenience store network.
The group is delivering positive can flow and debt is seen coming in below the previous guidance (£1.9-£2.2bn).
Management comments talk of continued focus on improving the shopping experience in order to stabilise sales. Costs are being cut and management strengthened under recently appointed CEO David Potts. The company continues to expect the second half to deliver stronger profits than the first.
Morrison is work in progress. The group are focusing on cash flow and reinvesting again and again into their pricing proposition. Cutting the dividend back further frees up cash flow. Last year, pre-dividend the group generated almost £800m of free cash flow, so the scope for paying down the debt is clear. The group is also well on the way to releasing £600m from working capital.
David Potts' strategic plans for the group make eminent sense; focus on the consumer, regain pricing competitiveness and improve the stores' appeal. With the highest percentage of freeholds (85% currently), Morrison has an inherently cash generative model, since less money is paid out in rents.
There is no sign of an end to deflation in food pricing; that will hold back LFL sales, but we see little alternative; Morrison is firmly in the sights of Aldi and Lidl and if it is to repel their threat its value focus must be relentless.
Analysts are likely to trim their profit forecasts for future years, but with debt falling steadily, and limited future capital spending plans, Morrison's financial position looks secure enough. But dividends are not necessarily at the bottom yet. The group's comment about future payments after the current year is noticeably woolly.
Commercial income, i.e. volume rebates from suppliers, is currently accounting for all of the group's underlying profit before tax, running at £179m (2014/15: £194m) in the first half. Clearly, Morrison needs to reach a position where it is making a profit without having to ask its suppliers for rebates.
Morrison has potential; billions of pounds of sales and a large freehold estate, with attractive cash generation qualities. But it still faces many, severe challenges. Earnings are likely to remain depressed for some time yet, and the group is still under-represented online and lacking any effective presence in the convenience channel. But debt is falling and the cash is pouring in, so this is a drama, not a crisis. The only thing assured, is that it will be some time before we know whether Mr Potts can restore Morrison to rude health.
All yield figures are variable and not guaranteed.