I’m a sucker for a decent recovery play, but you can take these things too far. The idea of snapping up ailing supermarket chain WM. Morrison Supermarkets (LSE: MRW) is just too ridiculous, even for me.
I have a history of taking daft punts on struggling companies, and a chequered history at that. I bought BP too soon after the Deepwater Horizon disaster, and took an instant hit. I snapped up Tesco after its big share price drop in spring 2012, and I’m still waiting for the turnaround. I bought BG Group after it plunged 20% in November 2012, and it still hasn’t sparked into life. But Morrisons? Now that would just be silly.
Clean The Tables!
Briefly, a few years ago, in a sudden bout of expansionary confidence, Morrisons threatened to challenge rivals such as Tesco and Sainsbury’s. No longer just for Northerners, its stores started to spring up in the more affluent South. But I quickly realised that away from its Yorkshire heartlands, Morrison simply didn’t have what it takes.
The last store I visited was on a scruffy out-of-town retail park in Harwich, Essex, a year or two ago. Morrisons was housed in a cheap new-build box, and was tatty, ill-lit and cramped, while the cafe was a depressing vista of uncleared tables (although the checkout staff were strikingly friendly). It didn’t look like one for the future.
Now its future looks all used up. Like-for-like sales plunged a disastrous 7.1% in the 13 weeks to 4 March. I’ve never seen a supermarket figure anywhere near that bad. Same stores, same products, same customers, 7.1% sales drop. The damage to staff confidence alone must be crippling, let alone the bottom line. Usually, that type of figure of alerts my ‘recovery play’ radar, but that was just too much.
Cheap And Chipped
Anybody who has seen a nature programme will know that jackals and hyenas start by picking off the stragglers in the pack, and so it is in the supermarket sector, with Aldi and Lidl taking bite after bite out of sickly, limping Morrisons. Worse, they have dragged it back to their own cost-cutting territory, forcing Morrisons to slash prices on 1,200 products as part of its Love It Cheaper campaign. It hasn’t helped. Morrisons started the price war by cutting its own throat.
Sometimes my old instincts take over, and I look longingly at Morrisons’ share price, down nearly 30% in the past 12 months. Then I check out its P/E ratio, currently just 9.5 times earnings. Finally, I drool over its juicy 4.9% dividend yield, by far the yummiest thing about this stock. In my weak moments, these numbers scream “Buy Me!”. I’m weak, but I’m not daft. Morrisons has a long and hard road ahead of it. This recovery play is just too dangerous, even for me.
