Last month’s first-quarter update from Wm Morrison Supermarkets (LSE: MRW) (NASDAQOTH: MRWSY.US ) reveals like-for-like sales down 7.1% excluding fuel.
That’s a poor result, but it’s unsurprising given that the firm predicts full-year underlying profit to come in between £325m and £375m — even on the most optimistic figure that’s around 52% down on the £785m achieved last year.
I think it’s reasonable to describe such an outcome as a profit collapse without being melodramatic.
Structural shift
Of course, the company is fighting back. Plans to drive £1 billion in cost savings over three years will help. Improving the layout of big stores might help. Opening 200 convenience stores by the end of the year should also provide a boost, as will driving up on-line sales.
However, whilst plans to slash the prices of 1,200 products, permanently, might help with customer retention, it’s difficult to see such moves helping to restore profitability. It’s starting to look like a mass-consumer movement to “alternative value suppliers” is wresting some of the big supermarkets’ traditional power away — permanent price slashing looks like something of a desperate measure.
It’s hard to disagree with Morrison’s chairman who says he thinks the customer shift to value is structural this time rather than cyclical.
Turnaround no more
Three months ago, I wondered whether Morrison had an element of turnaround potential at the current 193p share price. Today, I don’t think it has. We should think of forward profit forecasts as a downwards rebasing to a new normal. Sure, Morrison will maybe make progress from this new, lower level, but it will likely be on-trend and mild growth at best. There’s no frisky upwards re-rating on the horizon here. If anything, with the potential for the current customer backlash to protract into a new not-taking-any-more-nonsense zeitgeist, there’s now increased downside risk to holding Morrison shares.
With so many other better businesses on the London market, with better growth prospects and better dividend prospects, why should I risk my hard-earned capital on Morrison?
What now?
City analysts expect a 15% recovery in earnings per share in 2016 after 2015’s profit collapse. The forward P/E rating is running at about 13 and the forward dividend yield at around 6.2%. Forward profit predictions assume the dividend will be covered 1.25 times. To me, that’s a high rating for a company that has just revealed its poor growth credentials and a vulnerable-looking dividend.
Morrison’s dividend might look attractive to some, but I prefer better prospects on total returns rather than just an income from my investments.
