Investors: Show Caution over Morrisons

Despite yesterday's promising results - and the share price hike which followed, dragging the FTSE 100 to new hights - analysts warn that all is not well at Morrisons

Adam Kindreich, CFA 11 January, 2017 | 2:52PM
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Morrisons (MRW) supermarkets reported a further acceleration in like-for-like, sales growth in its most recent reporting period for the nine weeks ended January 1, 2017 – announcing it was the retailers best Christmas on record for seven years.

There is ample justification for caution. Volume growth is negligible

Growth excluding fuel was 2.9%, the fifth consecutive period of rising sales but Morningstar equity analysts are making only minor changes to our model, with no changes to our £1.82 fair value estimate or no-moat rating.

There is ample justification for caution. Volume growth is negligible, with the growth in transactions, which reflects increased customer numbers in stores, fully offset by a similar decline in the average basket size, continuing the trend of previous quarters. Online sales growth contributed only 0.6% to the 2.9% growth rate, while Morrisons reported deflation of 0.2% in the period, less than previously.

Almost all of the improvement in like-for-like sales growth is coming from a positive mix impact, which we think is unsustainable in its size, estimated to be contributing around 2%. Much of this relates to a significant increase in sales and floor space devoted to food-to-go, including prepared sandwiches. Going forward, it will be difficult to generate strong growth on these growth rates.

Credit is due to Morrisons for improved product availability and better service in stores, including lower prices. The competitive environment remains tough, and Morrisons appears committed to maintaining sharp pricing, which hampers any enthusiasm derived from a better top-line performance.

We have revised up our sales estimates, though most of the improvement is coming from higher fuel sales, 19% of the total, and fewer store closures, with like-for-like sales growth only marginally higher. However, we are slightly revising down our margin assumptions, which results in a cancelling effect, and we expect underlying profit before tax for the year to January 2017 of £329 million – revised guidance is £330 million-£340 million – which is unchanged, and £363 million for January 2018.

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Adam Kindreich, CFA  is an equity analyst for Morningstar

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