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Morrison - higher costs to be broadly offset by savings

Sophie Lund-Yates, Equity Analyst | 12 May 2020 | A A A
Morrison - higher costs to be broadly offset by savings

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Morrison (Wm) Supermarkets Ordinary 10p

Sell: 175.85 | Buy: 175.90 | Change 0.90 (0.51%)
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First quarter like-for-like sales rose 5.7%, excluding fuel. That reflects a strong performance from retail. Coronavirus means sales initially increased because of stockpiling, but trading weakened over Easter and as sales stabilised. Recent weeks have seen a marked improvement.

The group thinks higher costs this year will be broadly offset by savings from the government's suspension of business rates, but this will depend on how long the disruption lasts.

Morrison also reiterated it won't be paying a special dividend this year.

The shares were broadly flat following the announcement.

View the latest Morrisons share price and how to deal

Our View

Morrison has confirmed the inconvenient truth that extra sales come with extra costs. It's a mistake to assume a pandemic is purely good news for the supermarkets.

Volatile trading patterns, and tens of thousands of extra staff mean profits aren't expected to benefit over the full year - they could even suffer. The suspension of business rates will help offset the higher costs, but without knowing how long the disruption's going to last it's impossible to say what the net effect will be.

That means 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 McColl's deal gives the group some exposure to the convenience market too.

But Morrison's isn't a wholesaler at heart. The vast majority of sales still come from the retail business. And there are some growth opportunities here.

Morrison's online offering is smaller than some of its main rivals', but the huge demand for delivery slots has forced the group to up its digital game. While starting from a lower base means Morrison is unlikely to have participated in the huge upswing in online demand on the same scale as its peers, we see this as a catalyst for future growth. Especially as coronavirus is likely to have triggered a longer-term shift to online shopping, so if Morrison can use the current situation to lay a bigger, stronger foundation for the online business then this could be a benefit.

The tightened relationship with Amazon is welcome too. Helping Amazon scale up its online grocery delivery service is potentially lucrative.

While these are potentially exciting prospects, the main focus should still be on store sales, where performance was lacklustre before the outbreak. We also wonder if Morrison's lower price point makes Aldi and Lidl more of a threat. In order to stay competitive the group's cutting prices, which increases pressure on already thin margins.

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.

Overall we aren't concerned about Morrison's ability to survive the disruption -it's an important part of the machine that keeps the UK fed after all. The priority from here will be how it plans to keep hold of market s

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First quarter trading details

Retail like-for-like (LFL) sales rose 5.1% in the 14 weeks to 10 May. Customers are becoming more used to social distancing protocol and are spreading their visits to supermarkets over the week. For the last two weeks of the quarter retail LFLs were up 9.6%.

In conjunction with Ocado, the number of weekly home delivery slots has more than doubled, improving capacity ahead of Morrison's plan. A Click & Collect service will be available from 280 stores by mid-June. The partnership with Amazon, which provides same day delivery, was also rolled out to more UK towns and cities.

The Wholesale business saw LFLs rise 0.6% overall. There has been a significant increase in sales to convenience stores recently.

Since lockdown fuel sales are down around 70%, and total sales for the quarter including fuel fell 4%. Morrison's café business remains closed.

The group said "the negative fuel LFL is having a temporary impact on working capital and net debt, which we expect to reverse quickly when fuel sales normalise".

Morrison has access to £1.75bn of credit, only £70m of which has been drawn down. The group expects to draw on further funds next quarter. Scenario testing suggests there is sufficient liquidity headroom at the moment.

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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.