Bad news for real people is often seen as good news on the stock market. Yesterday’s announcement that Wm. Morrison Supermarkets (LSE: MRW) will cut 2,600 jobs sent the firm’s share price up by 2%.
The move is part of chief executive Dalton Phillips’ plans to drag Morrisons into the 21st century. Other areas being targeted include sales-driven computerised stock management and loyalty schemes. It’s all good stuff, but peers such as Tesco were doing it years ago — Morrisons has a lot of catching up to do.
Increasing prices is not an option for UK supermarkets at the moment, so the key to Morrisons’ turnaround will be cutting costs and boosting sales volumes. In my view, this will be difficult, but achievable, as these numbers suggest.
1. £1,550m
Morrison’s capital expenditure rose to a peak of £1.1bn last year, driving net debt up to a new high of £2.8bn. However, capex is expected to fall to £550m in 2014/15, which Morrisons says will improve free cash flow, and enable the firm to reduce net debt to between £2.4bn and £2.5bn.
Morrisons is also planning to deliver operating cost savings of £1bn over the next three years. Yesterday’s job cuts were part of this picture, as are the company’s IT projects, and its plans to reduce its range of stock by 20%, which should cut supply chain costs.
2. -4.2%
You probably don’t need me to tell you that -4.2% was the amount by which Morrison’s sales fell during the three months to May.
Morrisons made permanent cuts to the prices of 1,200 items on 1 May, which the firm hopes will trigger rising sales volumes, that will, eventually, offset lower profit margins.
The logic of this plan is sound, but what we don’t know is whether Morrisons will be able to persuade former customers, who have defected to Aldi and Lidl (or Tesco), to return and give Morrisons another chance.
3. £241m
Last year, Morrisons spent £241m on starting up its Ocado-operated Morrisons.com home delivery service.
As yet, there’s no word on how this is performing, except an ambiguous ‘ahead of expectations’ comment in the firm’s first-quarter update.
However, we should find out more in Morrison’s first-half results, on 11 September. The near-term impact on profits is unlikely to be significant, but if Morrisons.com has failed to launch successfully, it will be a big blow to Morrison’s longer-term growth ambitions.
