Yesterday’s news that Morrisons (LSE: MRW) is selling off 140 of its convenience stores for £25m proves that business is constantly changing. And, perhaps more importantly, sometimes it is a case of changing from one extreme to the other, then back again depending on market conditions and the management team in place.
In fact, under its previous CEO, Dalton Phillips, Morrisons sought to expand into a range of new sales arenas, notably convenience stores and online, as it sought to play catch up on rivals such as Sainsbury’s (LSE: SBRY), which already had vast exposure to both of those sales channels. Furthermore, Morrisons sought to reposition itself as a less Northern-biased supermarket, with deliveries being available for its online products across the south of England and its convenience stores helping to shift its store footprint to a more balanced position.
Now, though, it seems to be going ‘back to the future’ and instead of diversifying its business, is attempting to refocus on its core offering by selling all but five of its convenience stores. Certainly, the short term rationale for doing so is obvious: the convenience store estate was massively unprofitable. For example, it made an operating loss of £36m in the most recent financial year, and was expected to post a further loss of £23m in the current financial year. This, then, would have meant vast investment in the business which, in Morrisons’ view, was too risky while it is undergoing a challenging period.
This seems to be a logical stance to take: selling off the least desirable parts of a business and focusing on the more profitable divisions should have a positive impact on the company’s overall profitability. And, looking ahead, Morrisons is expected to deliver a rise in net profit of 17% next year. That is easily ahead of the 1% fall in earnings that is being forecast for Sainsbury’s. And, while the former may have a higher price to earnings (P/E) ratio than the latter, with it standing at 17.2 versus just 11.4, Morrisons has a price to earnings growth (PEG) ratio of only 0.8, which indicates that its share price could move much higher than that of its sector peer.
Furthermore, a challenge faced by Sainsbury’s is that it has a management team which appears to be intent on delivering an evolution rather than a revolution at the business. In other words, the strategy being pursued, while sound, is not all that radical and is not all that dissimilar (on a relative basis) to the one being pursued under previous management.
For example, Sainsbury’s still focuses on its brand match marketing campaign (albeit with only Asda as a comparator) and has maintained its wide range of products at a time when rivals are seeking greater efficiencies and more limited ranges so as to provide a boost to sales and profitability. Certainly, if trading conditions had not changed significantly in recent years then tweaks to strategy would be very wise. However, the UK supermarket sector is undergoing rapid change and it seems logical to introduce wholesale changes to address the challenging conditions facing major grocery operators today.
Morrisons, meanwhile, has an externally appointed CEO who has the licence to make major, fundamental changes to the business which, in the long run, have the potential to add considerable value for the company’s shareholders.
Of course, Sainsbury’s remains a very appealing investment at the present time. And, realistically, its performance in recent years has been considerably better than that of Morrisons, with it remaining in profit in four of the last five years, while Morrisons has been loss-making in two years during the period. However, with its superior growth forecasts and more radical strategy, Morrisons appears to be the more appealing buy at the present time, with its medium to long term future set to be very uncertain but potentially very profitable for its investors.
