It doesn’t take a great detective to work out that Wm Morrison (LSE: MRW) (NASDAQOTH: MRWSY.US) is not going to beat the FTSE 100 this year — especially not after the share price has slumped by 32% since the beginning of January to 177.5p today.
But I think it’s worth recapping the cause of the problems, and asking whether there’s an end in sight — after all, recovery situations can be very profitable!
Tough times
The entire supermarket sector has been hit by belt-tightening and the flight to cheapies like Lidl and Aldi. And of the big four of Tesco, Asda, Sainsbury and Morrisons, it’s the weakest that’s been hit the hardest. Morrisons just doesn’t have the diversity and the marketing clout of Tesco and Asda, and has not found a market niche like Sainsbury.
Morrisons is not competing in two key areas. Its online shopping service was woefully late, and the timing could hardly have been worse — pitching your offering against the big players in a time of depressed spending is just not the way to gain a loyal following.
Multi-format stores, like those smaller convenience stores, is the other trick that Morrisons missed — it’s trying to catch up, but it’s way behind the competition.
The result has been an 8% dip in earnings per share (EPS) last year after years of good but slowing growth, followed by a forecast 51% crash this year!
And the share price has been falling since well before the start of the year — from a price of 303p in September 2013, it’s lost 42%! In fact, Morrisons shares have bean beaten by the FTSE over one year, five years, and 10 years due to the recent slump.
The plan
What is Morrisons going to do about all this?
Unsurprisingly, in its full-year results released in March, Morrison told us it was going to focus on “acceleration of new channel development – online and convenience“, amongst other things including divesting some non-core activities.
By first-half time, chief executive Dalton Philips told us “We are six months into the three-year plan that we set out in March and, although it is early days, I am encouraged by the progress we have made“.
Tellingly, the firm also reiterated its intention to pay a full-year dividend of “not less than 13.65p“, after having having made a “commitment to 5% minimum increase in dividend for 2014/15 and a progressive and sustainable dividend thereafter” back in March. On today’s share price that would provide a massive yield of 7.7% and would not be covered by earnings!
Misplaced confidence?
The question is whether that underlying confidence in Morrisons’ three-year recovery plan is realistic. And I have to say I have my doubts — after all, it’s taking Tesco a lot longer than that to turn itself around, and it’s had to slash its dividend to help pay for the next battle in the price-cutting war.
