Shares in Morrisons were flat on the release of third quarter results, which showed a continuation of like-for-like (LFL) sales growth, albeit at a slower rate than earlier in the year.
CEO David Potts' plans for the group make perfect sense; focus on the consumer, reinvest in pricing and improve the stores' appeal. 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 firmly back in positive territory.
His plans don't stop there either.
His vision of a 'new Morrisons' includes a batch of capital-light wholesale agreements. Morrisons has signed deals to roll out convenience stores on petrol forecourts in partnership with Rontec, supply Amazon Fresh with groceries and revive the Safeway brand through a deal with McColl's. The group is targeting annualised wholesale sales in excess of £700m by the end of 2018, and more than £1bn in due course.
With the majority of stores owned rather than leased, the group already has strong cash flows, which help support the dividend. The shares currently offer a prospective yield of 2.9%, and analysts expect the payout to rise over the coming years.
However, potential investors should remember that there are still a few weak spots in the business. Morrisons is lacking a convenience footprint of any scale and its online offering relies on a partnership with Ocado.
Furthermore, conditions in the sector are far from supportive. An increasingly price-sensitive customer has led to fierce competition, squeezing margins across the board. With real wages falling, it's difficult to see this trend changing anytime soon.
All in all, we feel that David Potts is steering the ship in the right direction, but the waters ahead still look potentially choppy.
Third quarter trading update:
In the 13 weeks to 29 October, Group LFL sales excluding fuel were up 2.5%, comprising contributions from Retail of 2.1% and 0.4% from Wholesale.
The number of items per basket continues to decline, but footfall in the shops is good, with LFL transaction numbers up 2.1%. This means more customers are buying more often.
Morrisons launched an almost entirely new Home & Leisure range just last week, is growing its Best premium own label range and has plans to extend store pick home delivery catchment area in the North East.
The group's new automated ordering system is now fully operational in all stores across all food categories.
Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
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