Morrisons’ troubles have deepened, with annual losses quadrupling following a slump in sales and big property writedowns. Here is what analysts made of the results.
George Scott, senior consultant at Conlumino
Morrisons is the most vulnerable of the Big Four grocers to anaemic market growth and the ongoing squeeze from the discounters.
Morrisons’ attempts to get back on track have had some merit, but it has been late to the game and its initiatives appear disjointed ...
The success of Aldi and Lidl shows that consumers want simple, everyday transparent pricing, not promotional gimmicks. Accordingly, Tesco has looked to simplify its offers, helping drive some resurgence, a lesson Morrisons should heed.
On channels too, Morrisons has made some progress, but its moves have not been compelling enough. It added 51 [net] convenience stores over the period, growing its convenience estate to 153 M local outlets over the year, which represents an impressive rollout. However, for a format that is a world away from its Bradford market-food heritage in mid-sized supermarkets, its in-store execution doesn’t play to its fresh food strengths enough, is fairly weak on food-for-now and very me-too on food-to-go. Indeed, Morrisons plans to close underperforming M local stores over 2015/16.
Morrisons has made some decent strides online too, with annual sales reaching £200m, which is promising momentum. Its operations are sub-contracted to pureplayer, Ocado, undermining its ability to integrate it within its core proposition compared to the likes of Tesco and Asda which link their online shops well to stores through click & collect provision.
Morrisons needs a clearer strategy that plays to its roots more effectively and helps it to reconnect with its traditional customer base. To this end, we believe new personnel at the top have real credibility, with the requisite experience to cope with the mammoth challenge of turning Morrisons’ fortunes around. However, with price competition still intense at the start of 2015 and basket sizes showing no size of increasing, it is not yet clear how and where Morrisons can win back customers.
Jon Copestake, retail analyst at the Economist Intelligence Unit
Morrisons results confirm that incoming CEO David Potts will certainly have his work cut out to implement a change in fortunes. The deep fall in same store sales of 5.9% over the course of the year, coupled with the need to consolidate its convenience offering highlight the troubling competitive landscape that Morrisons finds itself in.
If there is a silver lining in these figures it is that sales declines were slowing by the fourth quarter to 2.6% and that the UK retail sector and broader economy have given reason for cautious optimism for the year ahead. Mr Potts will no doubt also benefit from bringing a fresh approach to Morrisons strategy and a honeymoon period which allows him to implement change. However, the backdrop of a tough pricing environment that has impacted on the sales and margins of all the big four players has highlighted that there is no silver bullet for mainstream retail. Three of the four largest UK supermarket chains now have relatively new CEOs and the coming year will be a strong test of how each of them can respond to the new discounter-led operating environment.
Independent City analyst Louise Cooper
Sainsbury’s wrote off £628m off its property assets in November with its results. When Tesco has its results on 22 April, I imagine it will be following the other two and writedown its property values. Stores are much less valuable for all. Note that Morrisons is the smallest of the Big Four and yet has taken the largest property hit.
Like Tesco, Morrisons is beginning to stem the haemorrhage of sales. Its worst sales performance of the year was in the Q2 when like-for-like sales were down 7.6%. By the Q4 that had recovered partly to -2.6%. But these are still negative numbers!
I wonder why the company has committed to paying a 9.62p final dividend to make a total dividend for the year up 5% to 13.65p. Morrisons only commit to a dividend that will be greater than 5p, suggesting a big cut. Why didn’t they cut the dividend this year? Why wait?
New CEO David Potts arrives next week but it looks like he is already taking charge with Thursday’s announcement – kitchen sinking the numbers. I imagine he will continue with more of the same – closing stores, cost-cutting, cutting prices (to some degree).
The easy growth of the past is gone - independents have largely all been swallowed up or closed down. The structure of the market and the strategies of the big groups make for a highly price competitive market.
Richard Hunter, head of equities at Hargreaves Lansdown
The numbers make for some generally uncomfortable reading, although there are signs that the turnaround plan is gaining traction.
The probable cut to the dividend will bring some disappointment, even if it was largely expected, but it does underline the company’s commitment to capital discipline, which will clearly be a major feature for Morrisons over the next year. Indeed, the reduction in net debt, cash generation and the fact that the three-year, £1bn cost-saving programme is on track are all indications of a reforming business. Meanwhile, the company hopes that the new CEO will give the strategy fresh impetus, partially by strengthening the convenience and online propositions, both of which are showing some signs of promise.
From an investment perspective, the attraction of holding the stock for its punchy dividend yield has now been largely removed, the company will continue to be compelled to cut prices and margins due to intense competitive activity in the sector, whilst inevitably investors may look elsewhere until such time as the turnaround shows sustainable growth.
The share price has tended to mirror these difficulties, having fallen 11% over the last year, as compared to a 1% hike for the wider FTSE100, although over the last three months there has been an 18% pop following the previously well received third quarter update. Even so, the enormity of the task ahead is patently visible, such that the market consensus has weakened of late to now come in at a sell.
Independent retail analyst Nick Bubb
The big question ahead of Thursday’s finals from Morrisons was whether they would cut the dividend and the answer is yes and no ... as expected, the final dividend is 9.62p to give a total dividend up 5% to 13.65p, in line with the commitment given a year ago, but in the new-year the dividend will be cut to only 5p, “to enable the investment to build trading momentum”.
“Momentum” is the big word of the day and the new chairman Andy Higginson says that “Under the leadership of the new XEO Dave Potts we will be focusing on building trading momentum and being more like the Morrisons our customers expect.”
The other big news is that, as had been mooted, Morrisons is slowing down its M Local convenience store expansion ...
Mike Dennis, retail analyst at Cantor Fitzgerald
The shares are up 15% in the last three months, underperforming the sector, and we believe there is more upside as we see significant potential for Morrisons to improve sales and profits in the next three years. We will review our target price post the results, but currently expect both improving sales and trading margin in 2015.
Morrisons is well positioned with 23% of sales supplied from vertically integrated businesses. This should provide management with the ability to make own brand a real point of difference as well as manage commodity price in/deflation and gain substantial upside from re-launching and expanding its ranges into more appealing higher growth premium sub-categories. The positive so far is that Morrisons has repositioned itself on price and absorbed its competitor’s strong promotional mechanics with the ability to produce healthy free cashflow. This, we believe, can be used to further reduce debt and provide capital to invest in new value formats and reposition the convenience store business (plan to close 23 M Locals).
The new CEO David Potts, in our view, needs to focus on rebuilding the core supermarket sales volumes (30k visits per store per week) and set the underlying store contribution margins at a sustainable level. We see potential for Morrisons supermarket sales to grow by 3% or circa £400m in 2015 to £13.4bn.
