Like-for-like (LFL) sales improved at Morrison toward the end of the year. On an ex-fuel, ex-VAT basis, Q4 LFL sales were up 0.1%, despite price deflation of over 3%. Total turnover was 4.1% lower at £16.1bn and the underlying profit before tax, before closure costs and restructuring charges, fell to £302m (2014/15: £413m), with underlying earnings per share of 7.8p (2014/15: 10.9p). A final dividend of 3.5p was announced, as expected. Future dividends will be set so as to be twice covered by earnings. The shares dropped slightly on the news.
Cash flow was stronger than previously expected, with £885m generated, before the cost of the dividend and net debts fell by almost £600m to £1.75bn, with a further $250m of debt redeemed just after the year end.
Morrisons say they are making good progress on their turnaround plans. They are generating cash faster than first expected and have identified an additional £50m-£100m p.a. profit opportunity from reshaping the business, along with further working capital improvements and property disposal proceeds. During the current year, Morrison will complete the planned three year, £1bn cost savings objective, but will continue investing into their customer proposition, through lower prices and service enhancements.
Chairman, Andrew Higginson said "The team made good progress during the year, with lower debt once again a highlight. We are on track to deliver improved future profits and returns for shareholders."
Morrison is work in progress, but appears 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, 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.