Embattled Morrisons (MRW) spooks the entire food retail sector with news it will slash prices in a desperate bid to get more customers. The Bradford-based grocer slumps 6.5% to 217.95p as the retailer guides towards a profits collapse this year.


Web chart - Morrisons - March 14


Morrisons' annual numbers for the year to 2 February are dismal with underlying taxable profits dropping 13% to £785 million. Sales were off 2% at £17.7 billion including a 2.8% decline in like-for-like sales. Morrisons, whose share price fall is likely to reignite buyout talk, has proved a major casualty of the structural change and polarisation underway in grocery retail.


Hard discounters Lidl and Aldi as well as the upmarket Waitrose are gorging on its market share, while the £5.6 billion cap has also suffered as a late entrant into the grocery market's two fastest growing channels, online, in conjunction with Ocado (OCD) and convenience.


Dalton_Philips Morrisons CEO


Under-fire CEO Dalton Philips (pictured above) today announces the results of a root-and-branch strategic review which will see the vertically-integrated grocer attempt to turn around its core business at a cost of £1 billion over three years.


The self-help drive will involve heavy investment in pricing and promotions. This causes shares in rival food retailers Tesco (TSCO), Sainsbury's (SBRY) and Marks & Spencer (MKS) all to fall as investors worry about a price war. There will also be a simplification of Morrisons' ranges and the introduction of a loyalty programme.


Capital expenditure on new supermarkets will be slashed in order to generate improved cashflow and return on capital employed, while £1 billion of property disposals over three years has also been announced.


The FTSE 100 constituent has swung from £879 million profits a year ago to £176 million losses after £903 million of exceptional costs. These include a £163 million charge pertaining to its planned sale of ailing and non-core baby products retailer Kiddicare – New York-based food retailer Fresh Direct is also under the hammer - as well as some £700 million of store-related writedowns.


A dire day for Dalton includes an awful outlook statement, in which Morrisons warns profits will collapse to between £325 million and £375 million this year. Consensus was looking for £684 million, yet margin investment and the impact of weak sales and negative operational gearing will erode profitability.


'The price war is looking brutal at the moment, but this outlook is significantly worse than expected,' writes Panmure Gordon. 'We retain our "sell" recommendation, and will review our price target once we have had a chance to fully digest the new strategy.'


Over at Shore Capital, retail sages Clive Black and Darren Shirley stick with their 'hold' rating for now, though they explain: 'We had anticipated downgrades to Morrison forecasts post today's update, but management's guidance range is significantly below our expectations, with the magnitude of price investment likely to have material implication for our sector wide forecasts going forward.'

Issue Date: 13 Mar 2014