No-moat Morrisons supermarkets (MRW) reported half-year results to end July 2016 showing continuing progress in like-for-like sales, which have been positive for the past three quarters, accompanied by significant margin expansion, brought about by stringent cost-saving measures. Net debt levels are also lower than guidance, so overall, the figures confirm that Morrison's turnaround is under way.
Morrisons now expects to be ahead of target in its three-year programme to save £1 billion
The like-for-like sales performance is encouraging, as sales were falling at a 2%-3% pace for several years until they turned positive in the quarter to January 2016. The second quarter to end July 2016 showed like-for-like sales growth excluding petrol of 2.0%, achieved despite continuing price deflation of 2% in the first-half period. The turnaround has been brought about by increased customer footfall, with supermarket transactions up 4.3% year on year in the latest quarter, though this is offset by a 5.0% slump in average basket size.
The growth in transactions suggests Morrisons is no longer haemorrhaging business to the hard-discount operators. Furthermore, store closures subtracted 2.7% from sales as part of an ongoing program to shut underperforming stores. Underlying operating profit rose 11% year on year in the half-year, with the margin improving from 2.3% in the year ago period to 2.6%, driven by significant cost savings.
Morrisons now expects to be ahead of target in its three-year programme to save £1 billion. Net debt levels dropped by nearly £500 million, and net debt will likely fall below £1 billion by end January 2018.
Morrisons is in stabilisation and optimisation mode, which is something quite different from a growth strategy. With no overseas operations, business depends on the UK economy and consumer, and whether Morrison can compete against both hard discounters and traditional supermarket peers.
Why Invest in Morrisons?
Morrisons is the fourth-largest supermarket chain in the UK, but in contrast to its larger peers, it operates a vertically integrated supply chain with more than 15 manufacturing facilities and more than 10 distribution centres. These capital-intensive manufacturing operations pose a barrier for new entrants and give Morrisons greater control over product quality.
Morrisons attempts to differentiate itself and capture the retail and manufacturing margin by touting the quality of its fresh food offering. However, we do not assign Morrisons an economic moat because we don't think it possesses a sustainable cost advantage or enough brand equity to sustain material price premiums.
