Morrison (Wm.) Supermarkets - we are all Tesco now

Morrison (Wm.) Supermarkets: As the board might say “we are all Tesco now” as new CEO David Potts settles down next to fellow Cheshunt alumni Andrew Higginson (Chmn.) and Trevor Strain (FD). These annual results to 1^st February 2015 were grim with the dividend outlook trashed, but we all expected that. It is now all about the future and whether Morrison can rediscover its mojo. (Not that mojo is on many of their customers’ shopping lists.) It is tough to be a supermarket when your LFL sales are down 5.9% (on top of the -2.8% in 2013/14) and operating margins were down 189bps year-on-year. This sent operating profits down to £442m, but then come impairment and property disposals to take the group to a £696m loss. Property impairments of £1,273m show how much demand for such assets has been eroded. (So well worth checking your property company shares for risk in this respect.) Underlying eps were 10.9p (-53%) on the back of which they have bumped the (now uncovered) total dividend up 5% to 13.65p, in line with previous guidance.

Now starts the hard slog of investing in more price cuts and achieving cost savings. The former total £315m so far, offset by £224m of cost savings with an eventual savings target of £1bn. Many of previous CEO Dalton Philips diversions (Kiddicare etc.) have already gone, but now comes their acceptance that the late entry into conveniences stores has not been a success. New ‘M’ store openings will be severely curtailed and the worst of the shops will be closed. Another cost saving is the dividend, which will be “not less than 5p per share” this financial year. All this will probably avoid the need for fresh equity, but that is not a certainty. The group is claiming some early success in turning the trading tide, but generally conditions are still ferocious, with a general background of deflationary pressures helping no one much. Morrisons needs to bin the de-misters and get back to being the great value first port of call for its heartland customers. Whether that will be enough, is unknowable at this stage. So far, the shares have rallied since the lows of the autumn, to around 203p. Assuming flat eps at 10.9p for FY2015/16 is perhaps harsh, but prudent. Along with a 5p dividend that is a PE of 18.6x and a yield of 2.5%. That may be tempting if you believe in a recovery, but I can’t see the rush, especially if income growth is your bag. (Neil Cumming^, 16^th March 2015)

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about. www.dividendpower.co.uk or e-mail at info@dividendpower.co.uk  Twitter:  @DividendPower