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Morrisons - Like-for-like sales grow, shares climb over 10%

Steve Clayton | 12 January 2016 | A A A
Morrisons - Like-for-like sales grow, shares climb over 10%

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Morrison (Wm) Supermarkets Ordinary 10p

Sell: 286.50 | Buy: 286.50 | Change 0.10 (0.03%)
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Morrison has reported that it returned to positive underlying like-for-like sales growth, for the first time in years over the key Christmas selling season. Total sales were lower, reflecting the sale of the convenience division and the impact of lower fuel prices on the forecourts.

The market reacted enthusiastically, pushing the shares up almost 10% at the opening.

LFL sales were up 0.2%, excluding fuel, down 0.6% including fuel and total sales, taking account of store closures were down 1.2% (-1.7% including fuel). The group lost the equivalent of 1.4% of sales due to closures and disposals of stores and today announced the closure of a further seven supermarkets. Price cuts drove deflation of 3.2% (ex-fuel) and c. 7% on a two year basis. Transaction numbers rose by 1.3% LFL.

Cost reductions led to circa 800 roles disappearing in head office, and Morrison have announced that some previously outsourced services will be brought in-house. Cash flow was strong and the group has announced that it expects debts to be £1.65-£1.80bn by year end, compared to Morrison's previous guidance of £1.90bn.

Full year profits of £295 - £310m are expected, before £60m of restructuring and closure costs, which is broadly in line with consensus. The group now expects a stronger future cash performance, driven by working capital and property sales.

CEO David Potts said that the group is improving all aspects of the customer shopping trip, with positive customer feedback and he welcomed the improved sales performance of the group.

Our view:

Morrison is work in progress. The group are focusing on cash flow and reinvesting again and again into their pricing proposition. Last year, pre-dividend the group generated almost £800m of free cash flow. The group now promises further progress on working capital, having already said they expect a £600m release.

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, accounted for all of the group's underlying profit before tax in the first half. 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 a lack of exposure to Convenience and an under-representation online.

But a return to positive LFL sales over Xmas is a hugely important symbolic step, because it 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 should be 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. +0.2% for just a few weeks is not enough of a swallow to pronounce that summer has arrived six months early. But it is a very encouraging sign, all the same.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.