Morrisons’ prospects ‘cause for concern’: City analyst

Panmure Gordon warned about the retailer’s lacklustre prospects today (March 7), after concerns expressed about Morrisons and Tesco by Shore Capital last month.

Graham Jones, Panmure Gordon’s executive director of equity research, said that after “a truly awful” ​Christmas period, “we don’t think the new year will be looking much brighter”.​

Morrisons warned in January that profits were likely to be at the bottom of the range of expectations. Since then, the grocery market had continued to slow as inflation came out of the system and the competitive environment declined further, said Jones.

Like-for-like sales falling  ​

The deterioration of trading in the second half of 2013 – with like-for-like sales falling 2.4% in the third quarter and to 5.6% in the six-week Christmas period – was a far cry from management expectations of a return to a positive performance, said Jones.

“This is disappointing, given the weak comparison and how much improvement Morrisons was supposed to have made improving its core offer through the rolling out of fresh formats, strengthening its own brand offering, and a better communication of its points of difference,”​ he added.

“This is clearly a cause for concern, particularly given the stepped up pricing activity by both Asda and Tesco in an attempt to address their own under-performances. It looks like the grocery market has continued to see slower rates of growth as inflation comes out of the system.”​

Recent Kantar data revealed the market growing by 2.4% in the 12 weeks to February 2, representing a slowdown from 2.9% in the 12 weeks to January 5.

Panmure Gordon cut its earnings per share forecast for the retailer in 2015 by a further 8% following earlier reductions. “It will be interesting to see how much ‘surplus capital’ it feels it can return to shareholders, although given the competitive situation at the moment, we are not convinced that materially gearing up the balance sheet would be a sensible option for the long-term,”​ said Jones.

Operating profit​

The analyst forecast Morrisons would report sales down by 0.5% to £18bn, with like-for-like sales down by 2.7%. Underlying margins, excluding new channel development costs, were predicted to dropped by 0.5% to 4.8%. “On the new basis including these costs, we look for operating profit to have fallen from £949M to £800M.”​ said Jones.

Profit before tax was likely to fall from £884M to £720M – or £785M before investment costs.

Meanwhile, Morrisons’ key advantage over its rivals was its freehold stores, said Jones. Morrisons owns about 90% of its portfolio, compared with Tesco and Sainsbury, which owns between 65–70%. Reducing those holdlings slightly to give some cash back to shareholders would “probably be a good thing”.​

Panmure Gordon retained its ‘sell’ advice on Morrisons’ shares.

Morrisons will release its full-year results for 2013 on Thursday March 13.

Last month, Shore Capital described Morrisons and Tesco as “the clear laggards”​​ among the big four supermarkets, while press reports suggested the Morrison family was considering taking the retailer back into private ownership​.