3 Worrying Reasons Why Wm. Morrison Supermarkets plc Is Ready To Plummet

Today I am looking at why I believe Wm. Morrison Supermarkets (LSE: MRW) (NASDAQOTH: MRWSY.US) fails to even make it to the bargain bin as a prospective stock selection.

Market share continues to slide

Morrisons continues to fight a losing battle against its British retailing rivals, both large and small, in an increasingly competitive market.

The firm has lost out heavily to budget rivals such as Aldi, which — according to research panel Kantar Worldpanel — reported a 31.9% sales leap in the 12 weeks to 18 August, a result which pushed its market share to a record 3.7%. Rising competition from high-end competitors such as Waitrose is also crimping volumes.

By comparison, Morrisons saw its market share drop again during the period, to 11.3% from 11.5% last year, as sales grew just 1.8%. The chain is not the only middle-ground operator to see sales decline, however, with Tesco and Asda also reporting noticeable market share drops. These operators are facing a hard time adjusting to the pincer attack from both top and bottom ends of the grocery market.

Consumers continue to feel pinch

To compound Morrisons’ woes, the retailer is having to battle against the rise of these heavyweight competitors against a backdrop of resilient pressure on consumers’ wallets.

Indeed, latest data from industry researcher Nielsen this week indicated that sales values in the fast-moving consumer goods (FCMG) sector is being driven by price inflation rather than an underlying improvement in demand. Indeed, growth of 2.6%  in the UK during April-June was pushed mainly by a 1.4% inflation rise, leaving actual growth of just 1.2% from the corresponding period in 2012.

Supermarket bracing for further earnings worries

Morrisons has initiated a multi-point plan in a bid to rectify its fortunes, from ramping up its presence in the increasingly popular convenience store space to undertaking wide-scale facelifts across its supermarkets.

Still, these measures — which will take some time to bed in — do not differ from what the competition is also undertaking. And its belated move into online shopping through its synergy with Ocado, due for launch early next year, will also face heavy competition from existing online rivals.

Shares in the supermarket have leapt in recent weeks, rising 14% in just over two months and topping out at their highest in more than a year in the process above 296p. In my opinion there is no foundation for this ascent as the supermarket’s performance continues to flounder, and I believe that the stock is in danger of experiencing a very severe price correction in the absence of obvious near-term earnings drivers.

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> Royston does not own shares in Wm. Morrison Supermarkets. The Motley Fool owns shares in Tesco and has recommended shares in Morrisons.