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Morrison - retail still down but on track for full year

Sophie Lund-Yates | 7 January 2020 | A A A
Morrison - retail still down but on track for full year

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Morrison (Wm) Supermarkets Ordinary 10p

Sell: 189.30 | Buy: 189.45 | Change 3.50 (1.88%)
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Like-for-like (LFL) sales, excluding fuel, are down 1.7% in the first 22 weeks of the second half. That reflects continued declines in retail while wholesale remained flat year-on-year. It also suggests trading over Christmas may have been weak.

However, good cost control means the group expects underlying pre-tax profit to be in line with analysts' forecasts for the full year.

The shares rose 2.6% following the announcement.

View the latest Morrisons share price and how to deal

Our View

While in-store sales are still shrinking, the wholesale business is keeping things ticking over.

Wholesale supply deals generated £700m of sales last year - and that number's expected to hit £1bn soon. News the group has tightened its relationship with Amazon will be particularly welcome. Helping Amazon scale up its online grocery delivery service is potentially lucrative and the McColl's deal gives the group some exposure to the convenience market.

But Morrison's isn't a wholesaler at heart. The vast majority of sales still come from the retail business

Looking at the bigger picture, the onus is therefore on shop sales to stabilise. At the moment, a lot of the big supermarkets are finding it tricky to hold onto market share, and Morrison's lower price point means Aldi and Lidl are a particular threat.

In order to stay competitive the group's cutting prices, which we think is the right move, but that also increases pressure on margins. Unfortunately lower prices didn't stop trading from falling flat at Christmas, when the festive period had previously been a reliable bright spot since the turnaround.

Cost control means profits haven't gone off the rails this year, but at some point performance will need to pick up - cost savings can't go on indefinitely.

Another sore point is the lack of a meaningful online business. Rivals are well ahead of the game, and Morrison's web-based offering pales in comparison. Investment is ongoing into this side of the business, but ideally improvements here would be a bit more forthcoming.

In the long run, Morrison's greatest strength is that a majority of its stores are owned rather than leased. That means cash flow is strong, underpinning the healthy balance sheet and giving the company breathing space. Investors will want to see Morrison use that to protect market share, and investments in new store formats should be watched closely.

In the past the extra financial flexibility has seen the group pay out special dividends alongside a growing ordinary, and the shares offer a 5.1% prospective yield. Remember though, no dividends are guaranteed and it's not impossible management decide the cash could be more usefully employed elsewhere.

For now, the shares trade on 13.7 times expected earnings, broadly in line with the ten year average.

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Trading Update

Overall sales, excluding fuel, dipped 1.8% for the year to date, reflecting a 1.7% decline in retail LFLs, amid what CEO David Potts calls an "unusually challenging period for sales".

The group continues to invest in price, and over the festive period its basket of key Christmas items saw most prices the same as, or lower than last year.

The flat wholesale performance reflected lower sales at McColl's convenience stores. The initial conversion of ten McColl's stores to Morrisons Daily convenience stores has performed well, and around another 20 will be trialled in the next couple of months.

Morrison recently sold its Camden store to Berkeley Group for £120m. The group also launched another 25 Fresh Look stores, taking the total to 44 this year.

Find out more about Morrison shares including how to invest

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 disclosure for more information.