William Morrison (MRW) at 165p after the Christmas trading statement. The management’s performance is attractively successful and confident. Trading over Christmas was far better than expected. I shall watch to see if the share price breaks out of this year’s downtrend. It looks close to doing so.
The William Morrison (MRW) share price may have fallen by 5.6% over the last year to 167p (last seen) but it has done better than the FTSE 100 Index, which fell more.
Over the last twelve months the share price of this Yorkshire-based supermarket food retailer fell just over 5%, whereas the rest of the FTSE 100 Index – from which Morrisons was dislodged last month – has fallen by just over 8%. That in part may tell us more about the FTSE 100 Index (that the supermarket, as unattractive as its outlook has been, is comparatively less awful than the prospects of those big energy and mining companies that dominate the FTSE 100 Index). But it also tells us that the market is not giving Morrisons equity a much easier time either. Nevertheless, Morrisons has done better than its former home Index. Now we have the Christmas trading statement to set that performance against.
The company’s trading performance in the nine weeks to Christmas was first of all a bit of an eye opener for the institutional analysts who had predicted a much worse outcome for the company.
The year before, the nine weeks to 5th January 2015, saw sales (excluding fuel) down 3.3% and ‘like for like’ sales down 5.1%. This time, in the nine weeks to 3rd January 2016, sales excluding petrol pump takings were up and ‘like for like’ sales were down – but nowhere near the collapse this time last year.
That is to say, this time money sales rose by 0.2% and the analysts’ ‘like for like’ version’ fell only 0.6% – a fall, but one which only represents about one eighth of last year’s ‘like for like’ collapse.
Clearly, the game has changed. Morrisons and its management appear to have been doing something unexpectedly different. The stock market confirmed that by pushing the Morrisons share price up over 12%, which is a lot for one day!
To judge from the analysis of those ‘like for like’ sales, it seems that although items per basket were down compared with last year, the number of transactions were up rather than down. This indicates, according to the company, greater satisfaction amongst customers with what Morrisons had to offer as more returned to shop at their ‘core’ outlets.
The path taken by the Morrisons management to a better performance is elementary and economic: reduce the complexity and scale of the company to optimise returns; concentrate on getting the best return on the core assets remaining; and focus on making customers happy in their shopping.
Keeping customers happy
The first thing of course is to cut prices of products, as all food retailers are doing. In quantifying the significance of that, the company plans to cut prices by between 3-7% over two years. That looks like a significant amount and a serious pricing counterpunch. There also appears to be a change in marketing psychology by concentrating less on what they call ‘multi save promotions’ (which sounds a bit like the old ‘Bogof’ which the old Morrison management ‘invented’ together with related mini ‘bulk’ buys) in favour of single offers of items in very large containers and very low prices. It was, for example, arresting to see serried ranks of very large cellophane bags full of healthy looking vegetables, priced at only £1 in a local Morrisons in the run up to Christmas.
Similarly, the company procured good like for like sales in premium beer and wine offerings with this approach of combining a visibly large product offer and an equally visible good price.
In other words, the Morrisons management are thinking enterprisingly and imaginatively outside a box of its own making. This is part of the explanation why the number of sales items in Morrisons shopping baskets fell by 3.6% in the lead up to Christmas whilst the number of transactions actually rose by 1.3%.
Cutting fixed costs and optimising operating margins
In addition to divesting the business model of one hundred and forty ‘local’ high street shops, the company has also announced that in addition to the already announced supermarket closures, it will close a final further seven supermarkets, bringing to an end this round of store and supermarket rationalisations.
The management is not just cutting fixed costs but also objectively selecting the most desirable for retention, and maximising unit expenditure on outlet improvements. In short, Morrisons is increasing the average returns on these supermarkets, in part by enhancing the stores in the most economical way, and raising store and group operating margins even at a time when prices are being reduced.
In addition, the management are also, at long last, beginning to add online sales and delivery to the business model. Not to have done so in light of what is already happening elsewhere would have been commercial and financial suicide.
Rationalised and fewer fixed store assets points to fewer overheads. Consequently, the company has announced that it will have eight hundred fewer head office jobs available, not simply because fewer people are needed but also through bringing what may be termed store critical services like store maintenance in house to achieve better results through better service. Again, the management is going back to basics by exchanging external market economies for in-house efficiencies.
Reducing debt
One of the most reassuring aspects of Morrisons’ performance is that it has been able to cut debt whilst cutting prices. Moreover, the debt reduction is progressive. Originally, the company had indicated that its net debt for the year about to end would clock in at between £1.9 billon and £2.1 billion. The company now indicate an annual figure of between £1.65 billion to £1.8 billion – around 13% lower than originally expected. The company seems to be squaring the circle of lower prices for customers and lower debt for shareholders.
These results are far better than thought possible with the company showing the mettle of its management.
Turning to recent market consensus estimates, the market is pencilling in a forecast 16% drop in profits this year but an estimated 22% recovery next year. In other words, we’re looking at earnings per share of an estimated 9p for the year ending this month, rising to over 11p for next year. Those forecasts mean a price to earnings ratio of 16 times for this year, falling to 13.7 times for next year and dividends of 5.15p and 5.56p, giving forward estimated annual dividend yields of 3.1% and then near 3.4%.
The management state that second half profits this year will be higher than last year with a firm and explicit guidance of £295 million to £310 million. The annual results are due in March.
The company is showing that it has responded very well – better than expected – to conditions in food retailing. According to my interpretation of the share price chart, the share price is still in a downtrend but close to a point where it could break that downtrend if the share price moves higher. If progress is confirmed in March, institutions that have not averaged their book position by buying stock to date will have good reason to do so then. The management is attractive. Consequently, so are the shares at this point, in my view.