UK grocer Morrisons reported a fall in half-year like-for-like sales and underlying profits today (12 September) but its shares still rose – as the City welcomed an increase in the dividend and a decision to cut its capex budget on building new supermarkets. There is still, however, some concern about Morrisons’ core business. Here is a round-up of what analysts in the Square Mile thought of Morrisons’ latest results.
Oriel Securities analyst Jonathan Pritchard
“Morrisons’ decision to reduce capex and return surplus capital to shareholders will be received very well by the market. Whilst there remain issues with core trading, the shares are not going down given the buy-back news. The key to this morning’s statement is the news Morrisons will reduce its plans for large store openings, and cut the capex from over GBP1bn per annum to around GBP650m. Management has identified that most of its growth opportunities now come in convenience and online, so capex requirements are now lower. Management will also adopt a more leasehold approach to new stores, having historically focused on freehold.
“The market will approve on Morrisons’ strategy change. The financials released today are not impressive: H1 was a tough period for Morrisons and the pick up in LFL in Q2 (up to -1.4% from -1.8% in Q1, is less than the market expected. The financials will however be overshadowed by the news on a cash return, and this statement of intent means that we move our recommendation from SELL to HOLD with a price target of 300p. the rest of the food retail sector is likely to take the news well.”
Jeffries analyst James Grzinic
“As expected Morrisons reported a mixed H1 given the margin effort of reversing the Q4 12/13 trading pressures and the increasing revenue costs of growth initiatives. Morrisons is now committed to reducing new space p.a. to c.350k sq.ft from ’14/15. This step down, combined with a reduction in catch-up and infrastructure investments, will result in a sharp capex reduction.
“The extent to which peers respond to Morrisons space rationality remains a major swing factor. Still, the group is demonstrating a level of discipline currently absent in other quarters. The shares have rebounded strongly from the June lows, and this may cap near term gains. We look forward to evidence of further LFL improvements as a future catalyst.”
Darren Shirley, Shore Capital
“Morrisons, as expected, has reported a challenging set of interim results, with total store revenues for the period reported up 0.8%, with LFL sales declining 1.6% (which implies Q2 LFL down circa 1.4%). Such subdued trading, coupled with management further investing in gross margin has lead to further erosion in margin, with we estimate continuing EBIT margin (post business development costs, pre GBP27m asset write off) falling 70bp to 4.6%, leading to EBIT of GBP408m. We suggest continuing pre-tax profit of £371m, a circa 16% fall year on year.
“Looking into H2, we note the commentary in the outlook statement that the full year performance will be broadly in line with previous expectations, as such we expect to be downgrading forecasts and will confirm post the analyst meeting.
“It is not all negative in the update, as management has outlined its future capital plans which will see a significant reduction in capital expenditure and new superstore space in the medium term. We see today’s statement as more positive for the UK grocery sector as Morrisons follows Tesco‘s lead in being more judicious with its capital, potentially leading to improving industry returns and cash flows.”
Keith Bowman, equity analyst, Hargreaves Lansdown Stockbrokers
“Morrisons continues to dangle the carrot. With the rollout of convenience stores ongoing and its push online now supported by Ocado, management now appear to view its armoury as complete, with group capital expenditure to be reduced. Shareholder returns are expected to be boosted by reduced investment expenditure and property sales, with Morrisons now also declaring an end to the space race.
“On the downside, the group has yet to execute – both profits and same-store sales have fallen, with the group’s slow adoption of both convenience stores and an online proposition allowing rivals to gain market share, share which will be tough to regain.”