Morrison's sales decline eases in third quarter - UPDATE

Supermarket chain Wm Morrison saw like-for-like (LFL) sales slip 6.3% in the third quarter but was optimistic about the Christmas trading period after price cuts and a new Match & More loyalty card that was proving "extremely popular" with customers.

The grocer, which has slashed prices in a bid to compete with discounters Aldi and Lidl, as well as traditional rivals Tesco, Sainsbury's and Asda, narrowed its guidance for underlying pre-tax profit for the full year to a range between £335m and £365m, from the previous £325m-£375m.

Morrison's LFL sales including fuel were down 8%, but despite being towards the lower end of analysts’ expectations the ex-fuels figure was an improvement on the 7.4% fall seen in the first half of the year and 7.6% in the second quarter.

Analysts at Cantor calculated that the 6.3% LFL fall was made up of declines of 3.2% in price deflation and 3.1% from volume.

"Morrisons is meeting the challenges created by a period of intense industry competition and structural change with quick and decisive action," said chief executive Dalton Philips.

"I am encouraged by the further progress we have made, especially on a number of key operational measures, cash flow and costs."

Total sales excluding fuel dropped 3.6%, or 5.6% including fuel, having fallen 4.9% to £8.5bn in the first six months of the year.

The FTSE 100 group saw volumes improve and the number of items per basket improve to a 2.4% decline year-on-year from 3.2% in the second quarter amd 5.9% in the first.

Online sales, via a new partnership with Ocado, contributed 0.7% to LFL sales during the period, with a new online hub opened in Greater Manchester and another in Merseyside opening very soon.

A "particularly encouraging" reduction in debt showed the company's free-cash generation credentials, Dalton suggested, with net debt now expected to be £2.3bn-£2.4bn by year end, around £100m better than expected.

He said the investment in Match & More was aided by a "really smooth" transition to a more powerful IT platform that was also helping drive cost out of the business.

Philips added: "We are the only supermarket that is price matching the discounters and the successful launch last month was a testament to the positive way our 120,000 colleagues are delivering innovation and embracing the changes at Morrisons."

"We look forward to the key Christmas period focused on offering customers the best in quality fresh food and value for money that Morrisons is famous for."

He pointed out that the company was beginning its Christmas promotions a month later than last year, which would also be "dramatically cheaper" for customers, and face comparisons with a fourth quarter last year that saw a 5.7% LFL fall.

Broker Shore Capital said the LFL performance was disappointing and the improvement in items per basket "feels like clutching at straws", saying it was yet to be convinced as to the likely effectiveness of Match & More.

"The business has entered a critical trading phase not just due to the Christmas period but because it trades against two years of negative LFL sales... It is essential that the group trades much more robustly in the current quarter and then displays more evidence than it is currently showing that its trading strategy is striking a much stronger chord with British shoppers.

"There are plenty of headwinds and bumps in the road facing Morrison's albeit a brighter future may yet transpire for its beleaguered investors."

For Cantor's Mike Dennis, "the issue to understand is if Morrisons top-line sales are expected to decline by circa £400m this year to £13bn and management stated they expect to make £220m of total cost savings, £20m more than the previous year’s £200m when sales were flat, how does that work unless costs are falling[?]"

"Morrisons are still opening new space, have launched a loyalty card, have a growing but immature margin dilutive convenience store operation and significantly less efficiency in the distribution network due to lower case volumes yet they expect to make £220m of cost savings.

"If Morrisons is seeing operational de-gearing, like Tesco, from lower sales and cash gross profit and plus £300m of investment in pricing and product then Morrisons will need to reduce cost in absolute terms by £100m. This could prove too difficult to execute if cash profit continues to fall."

Charles Stanley said Morrison remained "particularly vulnerable" to the structural shift in consumer consumption trends towards on-line and convenience stores given its limited exposure to these formats.

"The company will also remain vulnerable to aggressive expansion by the hard discounters, given a bias in its customer base towards lower socio-economic demographics. The company, however, has a clear plan in place to counter these threats and we are encouraged by the progress that has been made so far. Our confidence is growing that 2014/15 may represent the earnings trough, but visibility on the extent of any rebound in earnings in subsequent years is minimal."