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Morrison - Covid boosts sales but hurts full year profit

Sophie Lund-Yates, Equity Analyst | 11 March 2021 | A A A
Morrison - Covid boosts sales but hurts full year profit

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Morrison (Wm) Supermarkets Ordinary 10p

Sell: 286.50 | Buy: 286.50 | Change 0.10 (0.03%)
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Total revenue, excluding fuel, rose 8.9% to £15.1bn. On a like-for-like basis, this was up 8.6%. Despite the higher sales, underlying pre-tax profit fell 50.7% to £201m. That reflects higher-than-expected Covid-related costs, café closures and weaker trading in fresh food counters, food-to-go and fuel. Excluding the repayment of government business rate relief, underlying pre-tax profit would have been £431m.

Morrison expects underlying pre-tax profit, before rate relief repayment, to be higher than this year's £431m.

A final dividend of 5.11p per share takes the full year payment to 7.15p - up 5.6% on 2019.

The shares were broadly flat following the announcement.

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Our View

We were encouraged by Morrison's improving brand metrics at the end of the year. Market share has also nudged in the right direction. In the realms of the super competitive Big Four supermarkets, that's an important accolade.

The other piece of good news is skyrocketing online sales, with coronavirus triggering a huge increase in demand for delivery slots. Online sales have tripled, and capacity's up fivefold. This is partly a function of Morrisons' online business being smaller than rivals' - there's more room for exceptional growth.

If Morrison's can use the current situation to lay a bigger, stronger foundation for the online business then this could be a long-term benefit. We have a keen eye on the relationship with Amazon in particular. This won't move the dial yet, but could potentially be lucrative. Crucially, the online business is now profitable. There are currently enough sales rattling through warehouses to offset the expensive fixed costs. The question now is if Morrison's can keep a firm grasp on that momentum.

And that question rings true in the core store business. Morrison's is focussed on a volume-led approach, as it continues to cut prices. This isn't a new tactic, but is one that requires a high number of sales, or the already thin margins could suffer. As the vaccine roll-out continues and shopping habits potentially start to temper, lower prices could put a lid on profit potential.

With the recent sale of Asda and an all-round uber-competitive environment, it's unlikely pricing pressure is going to ease. The Morrisons brand has a new spring in its step, but we'd like proof its popularity can be sustained when the world looks a little more normal, as sales were lacklustre before Covid.

The challenging environment means Morrison's focused on bulking up its Wholesale supply business. The McColl's deal gives the group some exposure to the convenience market too.

To its credit, the group has prudently managed finances - most stores are owned, not leased, which helps the balance sheet. In the past this has meant special dividends for shareholders, but these are on hold while the group chews through extensive Covid-related costs.

Ultimately, we're impressed by the progress Morrison's is making. Its underdog status means it could offer exciting growth opportunities, especially as the price to earnings ratio is lower than the long-term average. Although this also probably reflects the market's concerns about Morrison's less competitive online position. For hardened proof of success we'll need to see what happens to trading and margins once shopping habits return to normal.

Morrison key facts

  • Price/Earnings ratio: 12.7
  • Average Price/Earnings ratio since listing: 14.1
  • Prospective yield: 5.2%

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Full Year Results

Retail contributed 7.8% to group like-for-like (LFL) revenue growth, with particularly strong performances in the second and fourth quarters. Total sales from in store and online were £14.2bn (93.9% of total revenue, excluding fuel). The group's completed its retail restructure announced in January, which has improved its logistics efficiencies. These efforts cost £36m. Six new stores were opened in the year.

The division also incurred £42m in costs relating to expanding the online business. The use of existing assets has been greater than expected in store-pick deliveries, meaning £76m has been added back to the valuation of these assets. Online sales tripled and capacity has increased fivefold. The division is profitable.

Wholesale LFLs rose less sharply, these were up 0.8%. Since the final quarter of last year, Morrisons has begun supplying the remaining McColl's convenience stores, not previously covered under the initial wholesale agreement. 300 McColl's stores will be converted to Morrisons Daily over the next three years.

Morrison is supplying the recently opened Amazon grocery store.

Direct Covid costs totalled £290m, the largest contributor (£99m) was higher staffing costs. Absences are starting to return to normal levels. £65 was attributed to extra waste and discounting, plus increased distribution costs.

Cash capital expenditure rose to £539m from £511m, and around £14m higher than guided.

There was a free cash outflow of £450m (2019: £238m inflow) because of the lower profits, higher stock levels and paying smaller suppliers more quickly during the crisis. Net debt, including leases, was £3.2bn compared to £2.5bn last year. This is equivalent to 2.4 times cash profits. The higher debt levels mean there will be no special dividend relating to last year.

Morrison expects a "significant" reduction in net debt in the current financial year.

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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.