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%.
Morrisons’ latest results – at a glance
- Second-quarter like-for-like sales, excluding fuel and VAT, up 2%
- First-half like-for-like sales up 1.4%
- Total turnover down 0.4% to £8.03bn
- Underlying profit before tax was up 11% to £157M
- Net debt reduced by £477M to £1,269M