Morrisons headed for financial problems: Analyst

The analyst expected Morrisons to report like-for-like growth of around 1.5% next week. However, it said total sales were likely to be down by about 1%, and while the management team is making “the right decisions”​ in an increasingly competitive market, its lack of scale could be problematic.

“Management is trying to add scale​ [with Amazon and Ocado deals],”​ said HSBC Global Research, “but the company remains in a weak strategic position, in our view.​

‘Further cost pressures’​

“Meanwhile, Brexit and the National Living Wage will bring further cost pressures, although a strong balance sheet and cash flow are positives, whereas Sainsbury is more vulnerable. We retain our 160p target price and ‘reduce’ rating on Morrison.”​

The analyst said store closures and disposals would be the driving force behind Morrisons’ drop in sales. Its decline in market share (just under 1.5% since January 2014) “is indicative of competitive positioning and relative scale”​.

While the retailer is generating cash, and its vertical supply chain means marginal costs are low, HSBC Global Research said “ultimately, Morrisons is a weak number four”​ in the market. “In an industry we regard as a quasi-natural monopoly, we think this disadvantage will become increasingly apparent,”​ the analyst said.

Third consecutive quarter of growth​

Its claims came one month after Morrisons posted its third consecutive quarter of growth​. Morrisons reported a second-quarter boost in sales of 2% (excluding fuel and VAT) on September 15.

Across the first half of 2016, it reported profit before tax had increased by 13.5% to £143M, and its total sales were also up 1.4%.