Bradford-based supermarket Morrisons (MRW) trades 2.15p lower at 223p, despite serving up a 10% hike in annual profits – an impressive third consecutive rise against a difficult consumer backdrop - proposing yet another special dividend and reporting rapid growth in its exciting wholesale business.

Investor disappointment perhaps centres on a like-for-like sales growth slowdown in the fourth quarter, from a third quarter 5.6% to 3.8%, as the core supermarkets business encountered faltering consumer confidence twinned with a tough comparator.

TURNAROUND ON TRACK

Results for the year ended 3 February reveal group like-for-like sales (excluding fuel and VAT) up 4.8% and a 10% uplift in pre-tax profit before exceptional items to £406m. Admittedly, that is a smidgeon below the £407m Shore Capital (SGR:AIM) was looking for, while Morrisons statutory pre-tax profit fell 15.8% to £320m after £86m of exceptional items.

Possibly weighing on investor sentiment is a second half retail like-for-like growth slowdown, with Q4 like-for-like sales growth moderating from 2% a year earlier to 0.6%. Yet the strongly cash generative grocer once again burnishes its income credentials by announcing another special dividend of 4p, taking the full year total dividend up the best part of 25% to 12.6p.

READ MORE ABOUT MORRISONS HERE

This was also important year for Morrisons’ burgeoning wholesale supply business, which grew quickly to achieve CEO David Potts’ (pictured below) target of £700m of annualised sales ahead of plan and contributed over 3% to group like-for-like sales.

Today, Potts insists his charge is on track to achieve a targeted £1bn of wholesale supply sales ‘in due course’. And despite the uncertainties engendered by Brexit, Morrisons remains confident it still has ‘many sales and profit growth opportunities ahead’ and the retailer expects that growth to be ‘meaningful and sustainable’, which will be music to many investors’ ears.

As Potts comments: ‘A third consecutive year of strong sales and profit growth, and a total annual dividend up over 150% during those three years, show the Morrisons turnaround is well on track. This turnaround is based on improving the shopping trip for customers, making Morrisons more popular and accessible.’

WHAT THE ANALYSTS ARE SAYING

Russ Mould, investment director at AJ Bell, comments:

‘First things first these numbers from supermarket Morrisons show the excellent job chief executive Dave Potts is doing at the group.

‘Revenue growth is the best seen in a decade and while statutory profit is hit by one-off items, the resilient cash flow performance delivered by the group is probably more relevant. After all it allows the company to deliver a healthy increase in dividends for shareholders.

‘The wholesale business, distributing goods under the Safeway brand, is a real star performer and plans for fresh diversification into convenience stores look a logical step.

‘There is plenty for Potts to think about, with German discounters Aldi and Lidl still snapping at the heels of the big four operators, Tesco (TSCO) in recovery mode and an uncertain fall-out from the likely collapse of the tie-up between Sainsbury’s (SBRY) and Asda.

‘However, what Morrisons needs to continue to focus on, and reassuringly Potts references this in his comments accompanying the results, is delivering the best possible shopping experience for its customers.

‘It sounds simple but, at a time when the retail sector and groceries face substantial upheaval, getting the basics right is more important than ever. Historically there may have been a bit of slack for a retailer which was not at the top of its game, that is definitely no longer the case.’

Over at Shore Capital, analysts Clive Black and Darren Shirley state: ‘Beyond Morrisons, we always believed that the proposed merger between Sainsbury’s & Asda was more of an opportunity than a constraint for the group and if the UK Competition and Markets Authority (CMA) sees through its provisional findings, we continue to stand-by that view. Morrisons is a high quality British food-maker and grocer.’

Retail sector guru Nick Bubb at Langton Capital adds: ‘Today’s finals are headlined “Meaningful, sustainable growth” and with underlying pre-tax profit up 10% to £406m and total dividends up by 25% shareholders will have much to be grateful to management for.

‘And McColl’s (MCLS) shareholders will be pleased to hear that Morrisons’ wholesale arm is expected to begin supplying their remaining circa 300 convenience stores at the end of this year and that 10 stores are to be converted to Morrisons Daily stores, although this is not really new news and there is no sign of a takeover, as might have been implied by the excitable jump in the McColl’s share price last week.'


Issue Date: 13 Mar 2019