Today’s trading update from FTSE 100 company WM Morrison Supermarkets (LSE: MRW) covers the 22-week period to 5 January. The figures lack lustre. Like-for-like (LFL) sales, excluding fuel, dropped by 1.7% in the retail division and came in flat in the wholesale operation.
No silver lining
And fuel sales didn’t save the day either. Total sales of everything dropped by 2.9% in the period with overall LFL sales slipping by 2.8%.
I reckon it’s hard to put a positive spin on these numbers because they include the traditionally busy Christmas holiday period. And in fairness, the company doesn’t try to. The update reveals to us “trading conditions remained challenging and the customer uncertainty of the last year was sustained.”
But it’s difficult to separate the general conditions in the sector from the specific conditions experienced by Morrisons. For example, I was once a loyal customer of the firm and did my weekly grocery shop at my local branch. But these days, I think of the company as an expensive option and visit rarely. Perhaps others feel similarly.
However, the company “continued to invest in the Morrisons price list while managing costs well.” And ‘investing’ in prices usually means cutting them, which seems like a good idea when you look at all the competition Morrisons faces.
Meanwhile, the fuel business suffered from the effects of a “highly promotional market,” and the wholesale business delivered reduced LFL sales because of lower total sales in the McColl’s division.
Profits holding steady
Chief executive David Potts said in the report he’s encouraged by the firm’s “strong” execution in the period and the “robust” profitability achieved, despite the falling sales.
He said it demonstrates the broad-based progress made during the company’s turnaround. And after normalised earnings evaporated in the trading year to February 2015, they are now forecast to remain broadly flat around the levels achieved the year before that.
I’m not expecting rapid growth to develop, though. Perhaps the biggest attraction is the rebuilding dividend with the yield close to 5%. In fairness, cash flow has been holding up quite well, but it’s been flat for several years.
There isn’t enough consistency in the trading and financial record for me to become excited by this stock. I like to see steady and generally rising revenue, earnings, cash flow and dividends. But it seems to me that forward assumptions are generally flat for most of those measures with Morrisons when we look at the trading year to February 2021.
In this case, I’d rather invest in an index tracker fund. Such a diversified investment would shelter me from the single-company risks of investing in share such as Morrisons. After all, the grocery sector has a headwind, and the company has already demonstrated its ability to drop the ball on profits and to crash the dividend – how long until the next trauma?
