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Morrison - Slower growth but still on track

Nicholas Hyett | 6 November 2018 | A A A
Morrison - Slower growth but still on track

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Morrison (Wm) Supermarkets Ordinary 10p

Sell: 291.40 | Buy: 291.60 | Change 0.00 (0.00%)
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Morrison reported a 5.6% increase in like-for-like (LFL) sales excluding fuel in the third quarter, with growth mostly driven by wholesale. However, that was slower than the 6.3% LFL growth seen in Q2, when the warm summer and World Cup boosted performance.

LFL transaction numbers grew just 0.2% in the quarter, compared with 2.6% in the previous quarter, with number of basket items down 1.5% on a year earlier.

The shares fell 5.6% on the news.

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Our View

CEO David Potts' plans for Morrison make perfect sense; focus on the consumer, reinvest in pricing and improve the stores' appeal.

We're impressed with progress so far. Customers are coming back and like-for-like sales are firmly back in positive territory. However, this is far from the end of the journey.

Potts has a vision of a 'new Morrisons', which includes several capital-light wholesale agreements. Deals have been signed 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. Wholesale profits should be in the region of £75-£125m.

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 2.8%, and analysts expect the payout to rise over the coming years.

However, there are still a few weak spots in the business. Most notably, Morrison lacks a convenience footprint of any scale and its online offering relies on a partnership with Ocado. The group did launch its 'Morrisons More' app in the third quarter, which allows customers to collect and redeem loyalty points digitally. It's good to see Morrison step-up digital efforts, but it's got a long way to go to catch up with rivals like Sainsbury and Tesco.

Conditions in the sector are not supportive. The planned merger of Asda and Sainsbury would squeeze Morrison from above and below, with a reinvigorated Tesco looking increasingly aggressive and expanding into wholesale. Transaction numbers have slowed recently too, which isn't ideal, although a lot of that's because the bumper summer set the bar really high.

Long term we feel David Potts is steering the ship in the right direction. A focus on value and service is clearly appealing to customers and a healthy balance sheet gives the company room for manoeuvre for now. But with the all-important Christmas period round the corner, the group could do with a return to the heady results we saw in summer.

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Third Quarter Trading Update

Morrison stores fuelled a 1.3% uplift in LFL sales in the quarter, while wholesale contributed 4.3%. Total sales were up 6%.

The Wholesale business benefitted from the ramp up in activity with convenience names Rontec, Sandpiper and McColl's as well as the Amazon Pantry partnership. Additional agreements mean that the group will soon be supplying branded and own-branded goods to 1,700 convenience stores.

The 'Naturally Wonky' brand of low priced fruit and vegetables continues grow, with Morrison also introducing more loose fruit and veg in stores. The group's vegan offering is being expanded, as is its 'Best' range.

A new fulfilment centre for online orders was opened at Erith during the period. That's an addition to the other centres already operated by Ocado for the group and the expanding 'store pick' offer.

Full year expectations remain unchanged.

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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

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.