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Morrison - Makeover continues

In results for the half year to 31 July, Morrison reported underlying earnings per share of 5.04p, up 35%, with the interim dividend up 5.3% to 1.58p. Like-for-like (LFL) sales are up 1.4% in the first half, excluding fuel (2% in the second quarter, a third consecutive quarter of growth).

Free cash flow improves 16% to £558m supporting a £477m decline in net debt to £1,269m and resulting in the year-end net debt target being lowered from £1.4bn-1.5bn to £1.2bn. Cost savings were £189m in the half and are now expected to exceed the three year £1bn target by the end of 2016/17. Further efficiency opportunities have been identified going forwards.

The shares rose 5% in early trading.

Nicholas Hyett, Equity Analyst, Hargreaves Lansdown

“Morrison are in the process of delivering one of the most impressive self-help fuelled turnarounds out there. A third quarter of like-for-like growth is welcome, coming after years of declines, but that’s really a side show.

The group is not so much taking a knife to its cost base as a meat cleaver. Targets on both working capital improvements and cost savings have been smashed and extended.

To some extent the fact that it can make savings of this scale is proof of how far behind the competition had fallen. On the other hand the sudden ramp up in free cash is allowing the group to rapidly slim the debt pile and fuelling investment in pricing and stores – providing ammunition in a price war that shows little sign of letting up (the group recently announced a 12% cut in the price of its essential meat and poultry range).

Morrison’s is not completely out of the woods however. Lower sterling will increase the costs of imported foods, and how far the supermarket is able to pass that increase on to customers remains to be seen. The store portfolio lacks a convenience offering and so is weighted towards the less popular superstore format. These could make growth hard to come by once the current round of cost cutting comes to an end.

Still, that monstrous free cash flow means the group has options open to it for the first time in a while."


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