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Retail Viewpoint – Morrisons

Morrisons has posted its seventh consecutive quarter of positive l-f-l growth with 2.6% growth for Q2 (3.0% for H1 to £6.57bn excl fuel). Its ‘Fix, Rebuild and Grow’ strategy has targeted improving the consumer shopping trip, and maximising the potential within its vertically integrated supply chain.

Morrisons’ strong trading momentum has also been accompanied by an improvement in profitability, with underlying operating profit before tax up 3.4% to £214m (vs H1 2016 up 11.3%). This increase in profitability is largely due to the £14m incremental profit realised from wholesale, services and online. Morrisons have a positive outlook on the profit contribution from this area, raising its estimates from £50-£100m of incremental profit to £75-£125m in total. The extra £25m will come from the wholesale agreement with McColl’s, announced in August. Wholesale l-f-l sits at 0.5% for the quarter, slightly up on Q1’s 0.4%. Inflation is still a headwind, largely due to lower sterling, and this is expected to continue for the foreseeable future.

Whilst Morrisons has a relatively easy comparative to meet for H1 2016 total sales (-0.4% group sales excl fuel), its l-f-l growth is where it really stands out. Q2 retail l-f-l of 2.1% (1.7% from supermarkets and 0.4% from online) shows that Morrisons has increased its relevance for the shopper. Morrisons has closed a number of underperforming stores to focus its efforts on growing the strong areas of the business, with a space closure impact of -0.4% on sales in Q2.

Morrisons’ future looks bright compared with competitors. From a struggling business facing speculations of acquisition, it has become a supermarket posting some of the highest l-f-l figures in the sector. Given that its turnaround strategy is ongoing, and it expects more progress to come, we would forecast positive l-f-l growth to continue. Its wholesale business is a big asset and further cost saving opportunities remain. These will allow price investment to offset further inflation if needed, as well as the opportunity to grow operating profit further.

The McColl’s partnership will provide incremental profit and a revival of the Safeway brand, which will allow Morrisons to tap into the convenience market as well as utilise the extra capacity in its supply chain. Morrisons key aims hold differentiation at the centre, which is essential in the grocery industry at the moment. The Morrisons café is an example of this, with its 385 cafes undergoing re-fits, producing 4% l-f-l for H1. Its strategy of constantly listening to customers and tailoring the business to their needs is paying off.

Source: GlobalData, 15th September 2017

Sept 2017

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