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Morrison - Progress, but challenges still ahead

George Salmon | 9 March 2017 | A A A
Morrison - Progress, but challenges still ahead

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Morrison (Wm) Supermarkets Ordinary 10p

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Morrison has reported good progress this year, with like-for-like (LFL) sales (excluding fuel) over the year rising 1.7%. Boosted by a strong Christmas, Q4 LFL growth was 2.5%.

However, the group also raised concerns over the potential impact of weaker sterling, with pension, staff and depreciation costs set to rise too. The shares fell 4.7% on the news.

Our View

CEO David Potts' strategic plans for the group make perfect sense; focus on the consumer, reinvest in pricing and improve store appeal. The early results mean that while he may still describe the group as a work in progress, that progress is becoming increasingly tangible. 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 around 85% of stores under freeholds Morrison has low rental obligations. This gives the group strong cash flow, and helps support the dividend. The shares currently offer a prospective yield of 2.4%, and analysts are expecting the payout to increase in the coming years.

Looking ahead, the group's expansion plans focus on capital light wholesale agreements. Its plans include rolling out convenience stores on petrol forecourts in partnership with Rontec, supplying Amazon Fresh with groceries and reviving the Safeway brand.

With billions of pounds of sales and attractive cash generation, Morrison certainly has potential. However, it still faces many challenges. The absence of a convenience offer of any scale and the fact its online offering relies on a partnership with Ocado are just two examples of areas where the group is lagging behind.

The fall in sterling after the referendum has added further uncertainty too. With the cost of imported goods rising, relationships all the way along the chain from producer to consumer are at risk of disruption. While it will want to keep prices low to stay competitive, profit margins of under 3% mean the group has little room for manoeuvre if suppliers refuse to take the hit.

Full Year Results

Excluding fuel, revenue was £12.7bn, down 0.5% as like-for-like sales growth was more than offset by the impact of store closures. As price deflation turned to inflation over the year, fuel sales rose 7.3% to 3.4bn.

Operating profit margin increased 0.17 percentage points to 2.6%. This helped underlying profit before tax rise for the first time in five years, jumping 11.6% to £337m, towards the upper end of previous guidance.

The final dividend of 3.85p supports an 8.6% increase in the full year dividend to 5.43p.

A further £393m of cost savings were realised over the year, taking the three year cumulative total above £1bn, with further improvements expected in the coming years. Morrison's free cash flow of £670m helped net debt fall by £552m to £1.2bn. The group expects this to fall below £1bn by the end of 2017/18.

Morrison acknowledges there are challenges ahead, especially around the impact on imported food prices if sterling stays at lower levels. However, the group says its strong cash flow and balance sheet gives it the confidence it can continue its recovery.

Unless otherwise stated, all estimated figures, including prospective dividend yields, are taken from a consensus of analyst forecasts compiled by Thomson Reuters. These estimates should not be taken as a reliable indicator of future performance.

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.