Morrisons Sales Up but Aldi and Lidl Win Supermarket Wars

Lidl and Aldi achieved 10% sales growth over the 12-week period to December 30, compared to Morrisons' 4%

Ioannis Pontikis 9 January, 2019 | 7:16AM
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Morrisons supermarket stock equities UK grocer

WM Morrison (MRW) reported its Christmas trading update for the nine weeks to January 6, with group like-for-like sales excluding fuel up 3.6%, supported by the retail and wholesale channels. These results were broadly in line with analysts full-year expectations. Morrison reaffirmed its full-year guidance.

Morningstar equity analysts maintain their £2.08 fair value estimate for the shares and continue to expect intensified competition and margin-dilutive growth in online and wholesale businesses to balance out any meaningful volume/mix gains achieved in the future.

Contribution from online through online partner Ocado's customer fulfilment centres was 0.4% in the period, implying 0.2% in-store like-for-like growth and negative store volume, given positive inflation.

Morrison's underlying drivers of top-line growth during the period were mixed, with the number of transactions down 0.9% versus up 2.3% in the same period last year, and items per basket rebounding, up 0.8% versus down 4.4% in the same period last year. In our opinion, a lower transaction number during Christmas is evidence of weak customer loyalty and could explain Morrison's commentary on market conditions, saying “There was a change in consumer behaviour during the period.”

Beaten by the Discount Supermarkets

With Lidl and Aldi achieving 9.4% and 10.4% sales growth, respectively, over the 12-week period to December 30, according to Kantar, and two thirds of all households picking a basket at either Aldi or Lidl in the same period and one third of Lidl's growth coming through branded product sales, less advantaged traditional UK grocers such as Morrisons are the first to take the hit, in our opinion.

We are still sceptical about two key aspects of the business: the company’s ability to drive profitable volume growth through its supermarkets i.e. negative store volume, and profitability of the company’s few volume growth drivers – wholesale and online, which in our view should be dilutive to the group's margins.

We maintain our negative moat trend rating – meaning we do not believe Morrisons has a competitive advantage over its peers and is not expected to gain one, as we expect continued margin and profitability pressures triggered by stronger competition, the company’s limited channel exposure, and the disruptive growth of hard discounters. The company will report fiscal 2019 results on February 3.

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Ioannis Pontikis  is an Equity Analyst for Morningstar

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