Has Morrisons (LSE: MRW) reached a turning point in its recovery?
Morrisons’ share price rose by 5% on Wednesday, and by 7% this morning, despite the firm reporting a 6.3% fall in like-for-like sales, excluding fuel, during the third quarter.
Volume, not price
The key thing to remember is that prices are falling across the board at supermarkets. Sales figures report turnover only, and don’t reflect sales volumes, so even if volumes are flat, turnover will fall, as prices are cut.
The challenge for Morrisons is to increase sales volumes, and today’s results suggest that the firm is moving in the right direction:
|
|
Q4 (2013/14) |
Q1 (2014/15) |
Q2 (2014/15) |
Q3 (2014/15) |
|
Like-for-like items per basket |
-6.9% |
-5.9% |
-3.2% |
-2.4% |
|
Like-for-like number of transactions |
-1.4% |
-3.6% |
-5.0% |
-3.3% |
Although the average number of items per basket is still falling, the rate of decline has reduced for the last four quarters. This suggests to me that customers are gradually being won over by Morrisons’ price cuts and simplified stock offering — the total number of items stocked has fallen from 24,500 to 22,150 over the last year.
These figures exclude convenience store sales, so aren’t being skewed by the smaller, more frequent purchases typically made at convenience stores.
Price matching Aldi & Lidl
Morrisons launched its Match & More price loyalty card during the last quarter, which the store claims guarantees price matching against Aldi and Lidl, as well as the other main supermarkets.
The number of items on promotion has been falling rapidly this year, and has dropped by 13% in each of the last two quarters, as Morrisons has cut prices permanently to match those at the discounters, and reduced promotional activity.
Profits on target
Morrisons used today’s update to confirm its outlook for the full year, and to narrow its guidance range for underlying pre-tax profit from £325m-£375m to £335m-£365m.
There was good news on debt, too: Morrisons says it expects to net debt to fall by £100m more than expected this year, and is targeting net debt of between £2.3bn and £2.4bn at the end of the year.
Is the dividend safe?
In September, Morrisons confirmed its commitment to pay a total dividend of “not less than 13.65p” this year. After today’s results, I’m fairly certain the firm will deliver on this promise, giving the shares a prospective yield of 7.9%.
The payout in future years’ may depend on whether Morrisons can convert this year’s progress into rising profits, but for now, I continue to rate Morrisons as a buy.
