Morrisons faces uphill struggle to improve sales trends

Morrisons faces uphill struggle to improve sales trends

Morrisons reported a full-year loss of GBP176m (US$293.6m) and further deterioration of like-for-like sales today (13 March). Management this morning set out a new strategic course for the group, which includes a GBP1bn price investment over the next three years. While next year's profits are expected to drop, the company believes the investment can be funded through a cost-saving drive in the medium-term. However, with concern over margins and competitive pressures, opinion remains divided over the prospects for the beleaguered grocer.

Jefferies analyst James Grzinic

"Repositioning aggressively on pricing follows an extended period of underperformance. The business recognises that its relative value positioning vs. purely price-driven competitors is detracting from the stores' appeal, and will address this vigorously. In the near term MRW will balance the impact of the current LFL headwinds, some GBP300m of value investment and the gradual offset from the build in opex savings (for a total of GBP1bn over three years, mainly driven by IT-enabled efficiencies and a simplified offer). The group expects 14/15 PBT of between GBP325m and GBP375m (post GBP70m of one-offs and GBP65m of new business costs). We now estimate a '14/15 PBT of GBP420m (ex one-offs) and a rebuild back to close to GBP700m by '16/17... Management has clearly elected to secure a stronger foundation to its customer appeal at a time of changing industry dynamics. Early pressure in the shares on ST earning cuts may well give way to interest in the shape of cashflow."

Bank of America Merrill Lynch Xavier Le Mené

"Morrisons has announced a major strategic move with a plan to invest GBP1bn primarily in prices over 3 years funded by GBP1bn of self-help, to massively cut expansion and capex and to sell GBP1bn of non-core property. This will drive an expected GBP2bn of FCF. FY14 results were in line, but as a result of the new strategy, the company has guided FY15 underlying PBT that is 30-40% below consensus. While the downgrade will certainly weigh on the shares, we think management's investment in the long-term positioning of the business and focus on cash generation is the right move strategically... The GBP1bn investment will be primarily in 1) permanently lowering prices, 2) fewer more impactful promotions, 3) making own brand more competitive & 4) introducing a loyalty programme. This will be funded by GBP1bn of self-help in 1) improving end to end supply operations (GBP300m), 2) reducing shrinkage (GBP200m) and 3) simplifying range & removing ineffective promotions (GBP500m). However, FY15 profit is expected to materially decline as investments initially outweigh cost savings."

Mike Dennis, Cantor Fitzgerald Europe

"Morrisons' management confirmed that it is going to invest GBP300m in price (i.e. more than Tesco's GBP200m and Asda's GBP250m) with part of the funding coming from the proceeds of a GBP1bn sale and lease back of distribution centres (Morrisons operates 14 distribution centres - worth c.GBP80m each), small shopping centres and stores over three years. Morrisons will also reduce costs by GBP900m over three years, sell Kiddicare and Fresh Direct stake and pay a minimum FY dividend of 13.65p in FY15E. Net debt was reported at GBP2.81bn, slightly higher than expected, but we should anticipate a significant reduction in FY15E net debt to GBP1.8bn on lower capex and S&LB proceeds. Morrison's JV with Ocado (OCDO LN - N/C) in Birmingham looks on track to achieve GBP70m of sales this year which should add a small incremental positive to sales. We believe, the issue now is that Morrisons has to explain how its price investment and expected improvement in sales will effect trading margins in 2015. We currently have factred in 1% LFL growth and 3.5% total sales growth in 2014/15. Management has guided to FY15E underlying PBT is above GBP485m and EPS is c.16p and the FY dividend 13.65p, giving a yield of 6.1%. This is a very bold move in our view and we will have to review the level of sale growth and cost savings to assess if current guidance is realistic."

Richard Hunter, Hargreaves Lansdown Stockbrokers

"In drawing a strategic line in the sand, Morrisons is attempting to close the widening gap with its rivals. The discount supermarkets have become a thorn in the side for the bigger players, and Morrison's lack of a properly established online or convenience store offering has seen its progress limited over recent times. The company has now decided that it is time to revitalise the business, which will inevitably come at a cost. Indeed, the outlook for next year is significantly lower and, whilst the new strategy is being implemented, the fiercely competitive supermarket sector will move on apace. Not all is doom and gloom within the numbers. The online and convenience store presence has at least now started, significant cost savings have been identified and, from an investment perspective, the current dividend yield of 4.7% will be boosted by another hike which reflects a continuation of the progressive policy. However, this sharp change of direction will require time and patience, which have been in short supply from investors."

Graham Jones and Damian McNeela, Panmure Gordon

"Morrisons' results were exactly in line with our forecast on an underlying basis, although there are GBP903m of exceptional costs relating to store write-downs (both existing and pipeline) and the exit from Kiddicare. The outlook statement is truly awful however, predicting a collapse in profits to GBP325m-GBP375m, versus our forecast of GBP672m and consensus of GBP684m, as they invest GBP1bn in their proposition over the next three years. The fact that Morrisons has identified GBP1bn of 'self-help' and GBP1bn of property disposals over the next three years, and have surprisingly committed to a 5% DPS rise will, in our view, provide cold comfort to shareholders today. We reiterate our Sell recommendation."