Morrisons enjoys barnstorming Christmas as wholesale rolls out

Supermarket group Morrisons reported on a much stronger than expected Christmas period, boosted by the roll-out of its new wholesale operations.

Like-for-like sales excluding fuel rose 2.8% in the ten weeks to 7 January, with the retail business growing 2.1% and 0.7% coming from a trial wholesale operation to supply convenience store partner McColl's. The consensus had been for like-for-like group sales growth of 1.8% against what was a very strong comparative in the festive period the preceding year.

The Christmas and New Year period saw particularly strong sales, with LFL sales roaring up 3.7% in the six weeks to 7 January, as retail grew 2.8% and wholesale 0.9%.

Customers lapped up the premium range, with sales up 25% as the range was broadened out, while an "almost entirely new" Home & Leisure range, replacing 95% of items with more modern designs, was also said to prove popular with customers.

Online grocery sales, via a partnership with Ocado, grew just over 10% as capability was added in more areas, especially in the north of England, to access Morrisons.com via a store-pick option, which the company said will continue to be added to more stores in coming months.

Output from what had been a trial of the wholesale operation was boosted by the collapse of wholesaler Palmer & Harvey late last year, as Morrisons stepped in to supply tobacco to McColls. Later this month the Morrisons wholesale arm will begin supplying all 1,650 McColl's stores, including with products under its revived Safeway brand, with a roll-out of around 25 new McColl's stores added each week.

Chief executive David Potts said: "More and more customers found more things they wanted to buy at competitive prices at Morrisons this Christmas."

Despite input cost pressures on many commodities, he highlighted that a price of a basket of key Christmas items was the same as last year, with LFL volumes in positive territory and LFL transactions up 2.3% year-on-year.

ANALYSIS: WILL SHORT SELLERS HANG ON?

Shares in Morrisons, which will report full year results for the 53-week financial year to 4 February on 14 March, had fallen 13% between September and Christmas amid interest from short-sellers that has seen 11.5% of shares out on loan. But the rebound that began last month accelerated on Tuesday, with 3% rise to 233.22p by 0930 GMT.

Analyst Neil Wilson at ETX Capital said the impressive update could turn the tide of opinion of a market that has "not really been buying into Morrisons’ recent run of form".

"Eight straight quarters of sales growth, yet shares were last trading c8% off the highs last February. That may change now and the shorts could face a big squeeze this morning. Short interest is quite high so this share could pop if they throw in the towel and finally buy into David Potts and co’s strategy, which is clearly paying off."

He said the wholesale business is a "good capital-light growth lever" for Morrisons, with the failure of wholesaler P&H meaning this unit heads into the New Year "in fine shape and with good options".

Laith Khalaf at Hargreaves Lansdown said: "The supermarket says it has become more competitive, which in an environment of inflationary pressure means it has likely taken some hit on margins, or passed some pain further up the supply chain, or both. This strategy appears to have borne fruit in the form of volume growth however."

He noted that wholesale activities are becoming more significant that adds to the tie-up with Amazon as part of the US tech giant’s foray into online grocery delivery in the UK.

Khalaf said that while food sales are not as vulnerable to a consumer slowdown as clothing, given the weak trading backdrop, the figures are worthy of a "cursory round of applause".

Mike van Dulken at Accendo Markets said the only blot on the update was that management left full year guidance unchanged, which is likely to be why the shares did not yet benefit from the type of short squeeze seen for Next last week.

"With 11.5% of shares out on loan, a Morrisons guidance upgrade was clearly needed to help the shares back to 2017’s 3.5-year highs of 252p," he said.

"Do we attribute management reluctance to upgrade as conservatism, designed to engineer a full year beat come the start to Feb? Or should we consider it prudence in the face of still tough conditions for the UK consumer? A break above 230p does get the shares back in the upper half of last year’s trading range, following a tough Nov/Dec, equating to a 16% bounce form the lows, but an even more optimistic message from management was clearly required in order to challenge the highs."

Van Dulken and other retail watchers also noted the bumper industry figures out from Kantar on Tuesday and were keeping an eye out for the message from Sainsbury’s as it releases its Christmas trading update on Wednesday, followed by both Marks & Spencer and Tesco on Thursday.