The retailer reported a loss of £176M for the year to February 2, compared with a profit of £879M in the previous year, while warning the challenging conditions of 2013 would continue this year. Its response was a new strategy to slash costs by £1bn over three years and reinvest the money in lower product prices to combat sharper competition from hard discounters Aldi and Lidl.
‘Profits collaspsing’
But Graham Jones, Panmure Gordon’s executive director equity research, warned of Morrisons’ “Profits collapsing next year under the weight of price war”.
Jones said: “The outlook statement is truly awful, predicting a collapse in profits to £325M–375M, versus our forecast of £672M and consensus of £684M, as they invest £1bn in their proposition over the next three years.
“The fact that Morrisons has identified £1bn of ‘self-help’ and £1bn of property disposals over the next three years, and have surprisingly committed to a 5% DPS [dividend per share] rise will, in our view, provide cold comfort to shareholders today.”
Jones added that the grocery price war was “looking brutal” at present.
Panmure Gordon repeated its ‘sell’ recommendation on Morrisons’ stock.
Meanwhile, Shore Capital maintained its ‘hold’ advice on the retailer’s shares. While analysts Clive Black and Darren Shirley had predicted downgrades to Morrisons’ forecasts, the scale of the drop was significantly below expectations, they said.
‘Price investments’
“The magnitude of price investment [was] likely to have material implication for our sector-wide forecasts going forward,” said Black and Shirley. “We also note the potential for the price investment to feed across into the highly-rated food producing sector over time.”
Earlier this week, Shore Capital issued a ‘red alert’ ahead of Morrisons’ results.
The Economist Intelligence Unit thought the loss unsurprising given the one-off costs and write-down costs linked to opening new convenience stores and its partnership with Ocado to develop an online channel.
Jon Copestake, retail analyst with the unit, said: “Given continued polarisation in the market, with discounters undermining the market share of mid-market sellers such as Morrisons and Tesco, bearishness for the coming year is also unsurprising.”
While competing on price might drive footfall, the strategy was not without risks. “Tighter margins and lower prices will dent profitability and could undermine some goodwill towards the retail brand. There is also a risk of price wars with the likes of Aldi and Lidl that could prompt a damaging ‘race to the bottom’ on price,” said Copestake.
Read how Morrisons’ boss Dalton Philips pledged to take on discounters Aldi and Lidl here.