I’ve said it before and I’ll say it again: traditionally ‘defensive’ stocks like supermarkets shouldn’t be difficult to assess from an investing point of view. If they are, it’s usually a sign that things are not as they should be.
Take Morrisons (LSE: MRW), for example. It’s a supermarket business. It sells groceries. It simply needs to develop good relationships with suppliers, and then sell the produce it receives from those suppliers in an attractive, easy, and cost-effective way.
Sounds easy, right? The reality has been far from easy for this supermarket chain. It’s easy to oversimplify things here, but I think there are two key reasons Morrisons is struggling. Firstly, it’s been priced out of the market, and secondly, it’s suffering from an identity crisis. All is not lost, though! Stay with me on this one.
I’m now going to talk about the company’s financial performance, its management, and I’ll then explain why Morrisons seems a little lost right now.
Grim reading
The financial statements are a grim read. Earnings fell by 51% to £181 million in the six months to August. Seemingly in response, the company says it’s now looking to generate £2 billion in cash and £1 billion in cost savings over a three-year period. The need for that ‘austerity’ comes from the fact the company is losing money. Its net profit margin for the first quarter for instance was -5.7%. It’s not rocket science — other lower-cost grocers have come into the market and chopped its legs off. Morrisons has tried to compete on price — as best it can — but has so far failed. It turns out that the customers Morrisons wants to pinch from Aldi and Lidl are quite content with a very sub-par grocery shopping experience. Those shoppers are all-consumed by their rock-bottom prices.
Not giving up
Still, the brave CEO of Morrisons, Dalton Philips, is not giving up. He was recently quoted in the press saying, “Morrison had been seeing an improvement in the number of items that customers put in their baskets.”. One of his comrades, Sir Ian Gibson, thought he’d also chip in saying trading conditions were tough but added that the whole industry was experiencing “unprecedented change”.
I’ve argued in previous pieces that that unprecedented change is a result of the Great Recession and the countless numbers of Britons that are having to work harder for less pay — meaning that trip to the supermarket has become an anxious one, with consumers watching every penny.
The major supermarkets have been forced to think outside the box. In Morrisons’ case, it’s opened 17 M local convenience stores and has re-branded on more than one occasion. It’s even tried to take on the low-cost players with its M Savers business.
The stock chart over the past 12 months looks like the front end of a ride at an amusement park. Data from the Financial Times also shows there’s evidence of a reasonable amount of short selling in the market.
Confusing
Despite clearly needing cash, the grocer’s decided to raise its interim dividend by 5% to 4.03p. Its full-year dividend now yields a very nice 7%, but how sustainable is that? And while Mr Philips says he’s encouraged by the progress Morrisons had made he admits there’s an “enormous amount of change” still to come. You can say that again — Morrisons has indicated to investors it’s committed to a three-year £1bn investment programme.
It really is ‘do or die’ for this supermarket chain. At least the nasty little share slide investors have witnessed over the past 12 months seems to be stabilising (possibly due to management’s commitment to re-shape the company). The market’s effectively said, ‘Okay, give it your best shot’. I sincerely hope it can work its way out of its current malaise. Until then, I’m not so sure Morrisons is the best company to be looking after your money.
