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Morrison - full year sales dip but stockpiling trend offers boost

Sophie Lund-Yates, Equity Analyst | 18 March 2020 | A A A
Morrison - full year sales dip but stockpiling trend offers boost

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Morrison (Wm) Supermarkets Ordinary 10p

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Full year like-for-like (LFL) sales excluding fuel fell 0.8%. That fed into a 1.1% decline in group revenue to £17.5bn. Underlying pre-tax profit rose 3% to £408m.

However, Morrison has seen sales trends improve in recent weeks as customers stockpile.

To protect cash flow in the wake of COVID-19 uncertainty, Morrison has decided not to pay a final special dividend. It announced a final ordinary dividend of 4.84p per share, taking the total payment for the year to 8.77p.

The shares rose 4% in early trading.

View the latest Morrisons share price and how to deal

Our View

Customer stockpiling in the wake of coronavirus is a short-term boost to sales. But as things return to normal, things should even out - provided supply chains make it through the disruption intact.

So it's important to focus on the bigger picture.

Morrison has focused on bulking up its Wholesale supply business in recent times. The division isn't small fry, with sales expected to reach £1bn in "due course". The tightened relationship with Amazon is 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

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 already thin margins. Cost control means profits haven't gone off the rails, but at some point performance is going to have to pick up. Cost cuts can't go on forever.

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. As the coronavirus outbreak progresses, we think this could be more of a problem than usual. If more people switch to digital shopping, Morrison could miss out.

To its credit Morrison is better prepared than some rivals to face a downturn. The group owns rather than leases the vast majority of its stores, which helps keep the balance sheet healthy and gives the company breathing space. We also think scrapping the special dividend to protect cash flow was the right thing to do in these uncertain times.

Another potential headwind is the government's announcement that all retail business could have a 12 month break from paying business rates in the wake of coronavirus. It's not totally clear yet what this means for the supermarkets, but if it applies, this would free up about another £300m.

Overall these are unprecedented times for the supermarkets. However, we worry Morrison's lack of a strong online business may hamper its ability to fully participate in the upwards sales trends. Longer-term we'd like to see store sales stabilise and further investment to protect market share.

At the time of writing the shares trade on 13.1 times expected earnings, slightly below the ten year average.

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Full Year Results

The decline in LFLs was again driven by the retail business, with these declining 1.4%. The group said political uncertainty, strong comparators from last summer, and increased promotional activity were to blame for the decrease. However, as people prepare for COVID-19 there has been a rise in sales, with retail contribution to LFL reaching 5.0% in the last six weeks.

Sales of goods in-store and online were £13.1bn, 1.5% down on last year.

In wholesale LFLs rose 0.6%. LFLs were impacted by lower sales at McColl's in the second half. Morrison signed a new partnership with Lotus in China - from later this year the group will supply around 100 CP Lotus stores with a small range of Morrison own-brand items.

Cost control meant underlying operating margins rose 0.05% to 2.9%.

Following the disposal of its Camden store to Berkeley Group for around £120m, Morrison has now exceeded its £1.1bn disposal proceeds target.

On a net basis, the number of stores stayed the same this year, but Morrison plans to open five new stores next year.

Free cash flow was £238m compared to £281m last year. Net debt rose slightly to £2.5bn (2018/19: £2.4bn).

Looking ahead, over 240 additional McColl's stores will convert to Morrisons wholesale supply during 2020. The group reiterated its financial position, saying it has cash and cash-equivalents of £305m and access to undrawn credit of £1.45bn.

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