In a brief Q1 trading update, Morrison's have revealed a second consecutive period of like for like (LFL) sales growth, with an increase of 0.7%, excluding fuel, for the 13 weeks to May 1. Morrison's filling stations proved especially popular, for despite 11% deflation in the period, Fuel LFL was positive taking total LFL sales to +1.2%. The shares rose almost 2%.
Morrison say that their online grocery business contributed +1.0% to the overall group LFL (ex-fuel) sales outcome.
Overall sales were lower, by 1.8% (ex-fuel), reflecting the closure of some unprofitable supermarkets and the disposal of the ill-conceived M:local chain.
Food price deflation was 2.6% for the group, which prevented the 3.1% increase in transactions and positive LFL volume growth translating into a stronger revenue growth performance. Food to Go was a big driver behind volumes, with sales here increasing by 17%. A decline in items per basket of 2.8% was ascribed to self-scan tills that encourage people to make more frequent, smaller purchases.
Free From, Morrison's range of goods targeting customers with allergies, or other reasons to avoid a particular ingredient, such as gluten or lactose, performed well, with sales up over 70%. Morrison's Makes It, a new marketing campaign aimed at showing Morrison's differentiated position has launched.
Morrison's remain committed to their year-end debt target of £1.4 to £1.5bn, but at this stage of the year, are not giving any additional profit guidance.
CEO David Potts said he was encouraged by progress at the group. A second quarter of positive LFL sales shows a stabilisation of trading and whilst Morrison expect food price deflation to continue, they are focused on improving the shopping trip for customers and increasing satisfaction measures. Growing LFL volumes is a key priority right across the group.
Morrison is work in progress, but appear to be heading in the right direction. The group are focusing on cash flow and reinvesting again and again into their pricing proposition. 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 is inherently cash generative, since less money is paid out in rents.
There is no sign of an end to deflation in food pricing; Morrison is firmly in the sights of Aldi and Lidl and if it is to repel their threat its value focus must be relentless. But debts are falling as the group focuses on cash, and Morrison's financial position looks secure enough.
Commercial income, i.e. volume rebates from suppliers, was £403m in FY16, accounting for all of the group's underlying profit before tax. 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 challenges, not least the absence of a convenience offer of any scale and the under-representation online. On the latter point, the Group earlier announced plans to further expand their relationship with Ocado. Morrison will also be providing wholesale supplies of produce to the Amazon Pantry service.
The return to positive LFL sales shows that Morrison can generate sufficient extra sales volumes to offset the ongoing level of price deflation. Customers are coming back to the stores, as evidenced by rising transaction numbers. Finance charges are falling as debts are repaid, and if the positive LFL sales trend can be maintained, then Morrison could be looking a lot brighter before too long. With the improving sales trend backed up by positive news on cash flow and debt repayments, Morrison look to have pulled safely through the worst.
All yield figures are variable and not guaranteed.