Makes it a year of like-for-like growth
Morrison's achieved a fourth consecutive quarter of like-for-like (LFL) sales growth, with LFLs (excluding fuel) up 1.6%. The shares rose by 1.3% on the news.
Morrison may still be a work in progress, but that progress looks increasingly rapid. CEO David Potts' strategic plans for the group make perfect sense; focus on the consumer, reinvest in pricing and improve the stores' appeal. The strategy seems to be working too. Customers are coming back to the stores, as evidenced by rising transaction numbers, and like-for like sales are back in positive territory.
Finance costs are falling as debts are repaid and with 85% of stores under freeholds, Morrison has low rental obligations. This gives the group strong cash flow, and in turn supports the dividend. The shares currently offer a prospective yield of 2.4% and analysts are expecting the payout to increase in the coming years.
With billions of pounds of sales and attractive cash generation, Morrison certainly has potential. However, it still faces many challenges, not least the absence of a convenience offer of any scale and under-representation online.
The supermarket price wars also continue to rage, so while Morrison's work on pricing is impressive, it may be far from complete. The fall in sterling after the referendum is an added complication - whether supermarkets will be able to pass the increased price of imported food on to shoppers remains to be seen.
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.
But for now, Morrison's position looks secure enough. If the positive LFL sales trend can be maintained, and the group can generate sufficient extra sales volumes to offset the deflationary impact, then Morrison could be looking at a brighter future.
Third quarter trading in detail:
Total sales (ex. fuel) fuel were down 1.2% (up 1.1% inc fuel), reflecting the continuing impact of supermarket closures and the exit of M local. On a LFL basis, sales (ex. fuel) were up 1.6% (up 3.4% inc. fuel). Halloween was a success for the group, with seasonal sales up 20% year-on-year.
Recent pricing and transaction trends continue in Q3. Transaction numbers are up 4.1% in the quarter, while prices are on average 1% lower than this time last year.
Morrison say that the launch of its premium range 'he Best' has gone down well with customers, and this line will be expanded in the run-up to Christmas.
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