Best Christmas for seven years
On a like-for-like basis, Christmas sales are the strongest the company has seen for seven years. As a result, the group is now expecting underlying profit before tax for the year to come in at £330-340m, ahead of analyst consensus. The shares jumped by over 4% 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, and like-for like sales are now firmly 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 helps to support the dividend. The shares currently offer a prospective yield of 2.5% (not a reliable indicator of future income) for its next financial year, 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 an under-representation online.
The fall in sterling after the referendum has complicated matters too. With the cost of imported goods rising, relationships all the way down the chain from producer to consumer are at risk of disruption. While it will want to keep prices low, the group now has little room for manoeuvre if suppliers refuse to take the hit. Profit margins, at just 2.1% last year, are already less than half of what they were in 2012.
Christmas trading in detail:
Despite the continuing impact of store closures, total sales rose 2.0% excluding fuel (4.0% inc. fuel) in the nine weeks to 1 January 2017.
Excluding fuel, like-for-like (LFL) sales excluding fuel rose 2.9% (4.7% inc. fuel), helped by strong growth in transaction numbers, up 5.2% year-on-year during the period.
Within the stores, fresh categories such as Fruit & Veg, together with Beers, Wines & Spirits, the more premium 'Best' offering and Nutmeg clothing all performed well.
Morrison says that service standards improved at the checkouts and on the shop floor, and a new automated ordering system has helped to reduce stock levels while still improving stock availability for customers.
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