WM Morrison’s Q3 FY19/20 trading update (5 August to 3 November) was ahead of the market’s as well as our estimates. However, the performance in the subsequent nine weeks (Christmas period) has been weak, as management stepped-away from promotional activity, unlike peers. Soft inflation was also not helpful. Sustained lfl growth is quite vital for investor sentiment and management seems to be also on the same page. We take a cautious stance on the company until the Q1 results (the next key trigger).
Companies: Wm Morrison Supermarkets Plc
Q1 resulted in a sequential slow-down in lfl retail growth compared with the past few quarters. The new deal with Ocado is likely to save some bucks (in the near term) and enable Morrison to make new digital partners. However, it remains to be seen if Morrison is able to leverage this opportunity. We will trim our estimates slightly but maintain the stock recommendation.
The FY18 performance was in line with the street’s expectations. The key highlights were an increase in the special dividend and healthy free cash flows. However, lower capex in FY18 is attributable to the delayed timing of some investments and management expects higher cash outflow in FY19. We believe the company will remain healthy and well-equipped to sustain this performance (positive lfl and preservation of profit margins). No changes to our stock recommendation.
Despite softer consumer demand in November, Morrison performed better during the Christmas period. Although the company has slashed prices of c.1,000 core products to remain competitive / improve customer perception, other players are also likely to follow suit. We expect increased pressure on the company’s profitability in the forecast years. We will be reducing earnings but maintain the stock recommendation.
The Q3 results were in line with our estimates but below consensus (due to retail business). The biggest investor worry is softer growth in transaction volume and apprehensions about Morrison’s Christmas performance. Although we continue to believe in management’s capability, it looks as if there will be a tough fight ahead in the forthcoming holiday season, as the competitors are also well-equipped and will not leave any stone unturned to grab the biggest pie. We have tweaked our estimates but no change in stock recommendation.
Morrisons reported strong Q1 FY18/19 results. Despite sequential moderation in retail business lfl growth, the incremental contribution from McColl contract (wholesale business) boosted the group’s top-line. The company is healthier today with lower leverage and a stronger balance sheet. However, the proposed Asda-Sainsbury merger might put more pressure on the retailer in the mid/long-term. Our stock recommendation remains unchanged.
Morrisons clocked good lfl growth in Q3. Its recent tie-up with McColls is margin enhancing/return accretive. However, the retailer is likely to face higher competitive pressure especially from German discounters and Asda. We have slashed profit margins as the grocer is estimated to burn more cash to preserve market share (lost 20bp recently) in forecast years. We have also applied a discount in the peer valuation to capture competitive headwinds and weaker investor sentiment. Our recommendation is reset downwards at Add.
In the 13 weeks to 30 April, group lfl sales excluding fuel, were up by 3.4%, comprising contributions from Retail of 3.0% and Wholesale of 0.4%. Group LFL including fuel was up 6.3%. Total sales excluding fuel were up 2.8% after the impact of last year’s store closures. Including fuel, the growth came in at 5.8%.
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Morrisons announced FY 16/17 sales at £16,317m, slightly higher than our expectations. Margins rose leading to a £305m net result, i.e. a net margin of 1.8% vs. 1.3%, a year ago. Morrisons succeeded in reducing its net debt despite a stronger capex, mainly thanks to improving cash flows from operations. The proposed dividend is about 5.43p per share vs. 5p a year ago (5.16p in our model). Regarding the outlook, Morrisons reiterated caution about Brexit’s impact on depreciation and pension costs (£272m surplus in the wake of the triennial valuation). Management remains confident of a £50-100m incremental profit as a medium-term target (vs. £18m this year) thanks to further cost savings (beyond £1bn) and the strong broader business (Ocado and Amazon). Net debt should continue to fall (less than £1bn by the end of 2017/18) due to improving working capital control.
In the nine weeks to 1 January, lfl retail sales impressed with 2.9% growth. Including fuel, total sales were up by 4.0% on a lfl basis. This came after improving lfl transaction growth of 5.2% yoy, soaking up the smaller basket’s impact (-5.3% yoy). Morrisons’ achievement is its best for seven years and higher than the previous Christmas period, by 2.0%. Morrisons has increased its profitability guidance: underlying operating profit will be in the range of £330-340m. According to management, FY16/17 net debt is expected to be £1.2bn (in line with our model).
Supermarket chain says it expects to deliver pre-tax profit of between £330-£340m
Sales (excluding fuel) increased on a lfl basis for the fourth consecutive quarter. Fuel inflation prices led to a lfl sales rise of 3.4%. However, the smaller store portfolio following the disposal of M Local (140 stores) affected its total sales, capping the rise to just 1.1%. A strong Halloween period, when revenues soared by 20% yoy, has lifted Morrisons’ Q3 results. The online business contributed 0.9% lfl.
H1 sales came in at £8,032m, a slight decrease compared to 2015/16. The operating profit improved by 30.2% yoy, following a more rigorous cost savings plan (administrative expenses were halved). Net profit stood at £110m, i.e. a net margin of 1.37%, almost stable compared to H1 15/16. Morrisons succeeded in improving its FCF (£556m vs. £468m in H1 15) and reduced its net debt (by £477m) following the enhancement in margin, an improvement in working capital control and opting for a light-capital strategy.
Supermarket chain saw 30% YoY profit growth
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