CEO hails start of turnaround

Morrisons continues to feel squeeze

MorrisonsMorrisons’ continued to feel the squeeze from tough price competition in the supermarket sector as annual profits took another hit.

Chief executive David Potts insisted: “We have started the journey to turn around the business and make our supermarkets strong.”

The chain, which last week unveiled a well-received distribution deal with Amazon,

Underlying pre-tax profits of £242m in the year to 31 January fell from £345m a year earlier, although it reported a profit before tax of £217m against a loss of £792m in the previous period.

Like-for-like sales, excluding fuel and VAT, were down 2%. Total turnover was down 4.1% to £16.1bn (2014/15: £16.8bn).

The proposed final dividend is 3.5p, bringing the full year to 5p (2014/15: 13.65p).

The company was re-admitted to the FTSE100 last week and in early trade the shares were flat at 201.5p.

Mr Potts said: “By improving the shopping trip for customers, we have started the journey to turnaround the business and make our supermarkets strong. Our listening programme is informing and shaping the six priorities that are now driving the improvements that customers are noticing.

“Our strong balance sheet and cash flow provide the platform for turnaround and growth, but what makes us truly unique as food maker and shopkeeper is the personality and dedication of our thousands of colleagues. I am confident these strengths will help us fix, rebuild and grow Morrisons.”

Andrew Higginson, chairman, said: “I am delighted that the reshaping of the board and executive committee is now complete. The Morrisons team now comprises a wealth of internal and external talent with the experience to deliver the turnaround.

“The board is pleased to be announcing that future dividends will be covered around two times by earnings per share, which is a policy that aligns shareholder returns with the long-term performance of the company.

“The team made good progress during the year, with lower debt once again a highlight. We are on track to deliver improved future profits and returns for shareholders.”

Analyst reaction

John Ibbotson of the retail consultants, Retail Vision said: “While Morrisons’ numbers have started to improve, and Potts is doing a good job, it’s hard to believe we are entering a new era for the struggling grocer.

“Morrisons had a half decent Christmas in relative terms and the Amazon tie-up has put a spring in its step but the market environment it is operating in remains as brutally competitive as ever.

“The discounters have gone nowhere, food deflation is entrenched and shopping habits are almost unrecognisable from a decade ago.

“Meanwhile, the elephant in the room is ASDA, which overlaps the most with Morrisons in the north.

“Bankrolled by Walmart and implementing Project Renewal, ASDA will become a superstore with discounter prices and is set to pose the biggest threat to Morrisons in the months and years ahead.

“Selling a few lines of fresh food from its own factories through Amazon will not make up for the ongoing structural sales and profit decline at Morrisons.

“For all the hype, Morrisons’ sales have still slumped and earnings are being inflated by asset sales, and there aren’t many assets left.

“Morrisons may be back in the FTSE 100 and it may have teamed up with Amazon, but many will argue its core business is still mutton dressed as lamb.”

Russ Mould, investment director at AJ Bell, said: “Lower debt, lower costs and a long-awaited increase in like-for-like sales all give Morrisons some welcome momentum as the supermarket chain prepares to return to the FTSE 100 after a brief period in exile.

“The slashing cut in the dividend to 5p from 13.65p ends a nine-year run of growth in the shareholder distribution but this had already been well flagged and shareholders will welcome what could be an inflection point in sales.

“Morrisons had enjoyed a fourteen-year run in the FTSE 100 prior to its demotion in December and chief executive David Potts will be delighted to see the firm bounce back after just one quarter.

“Potts appears to be under no illusions about how difficult trading remains, given the ongoing focus on costs but the link-up with Amazon Pantry is a coup, and despite the good run in the shares from 140p in December to  the 200p mark it is possible the shares still have potential for patient value-seekers.

“Add together the firm’s £4.7 billion market cap and its £1.7 billion net debt pile and you get a total enterprise value of £6.4 billion – yet the company has fixed assets on its balance sheet with a value of £7.1 billion. There is still a risk the store sites would be overvalued – and that write-downs would follow – in the event of a fresh downturn in sales, but at least this discount valuation factors in some of this danger as the company battles the discount groups like Aldi and Lidl.

“All eyes will now switch to imminent results from Sainsbury (a fourth-quarter trading statement on 15 March) and Tesco (full-year results on 13 April), since the Food & Drug Retailers sector has surprised everyone this year, ranking the third-best performer in the FTSE All-Share in the year to date.”

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