11.1 Reasons That May Make Wm. Morrison Supermarkets plc A Sell

Today I am outlining why I believe shares in Wm. Morrison Supermarkets (LSE: MRW) (NASDAQOTH: MRWSY.US) are set to head lower as competition in the UK grocery space hots up.

Market pressures continue to weigh heavily

Latest news from research house Kantar Worldpanel proved further evidence that Morrisons’ attempts to revive its ailing sales performance continue to miss the target. Most recent data last week showed the firm’s market share in the British grocery space had slipped to 11.1% in the 12 weeks ending mid-September, and signs are thin on the ground that the chain can climb out of this tailspin any time soon.

Morrisons’ share of the market stands at its lowest for more than five years, and Kantar noted that the growing popularity of high-end chains such as Waitrose and budget specialists including the likes of Lidl “is forcing the major supermarkets to compete for an ever-smaller middle ground.”

Mid-tier rival J Sainsbury has invested heavily over a number of years to limit the effect of these competitors and actually grow its market share, successfully refining the quality and image of its in-house brands and effectively integrating non-food items into its product portfolio, for example. The supermarket has also been particularly active in terms of growing its online division and rapidly expanding the number of its convenience stores in line with changing customer habits.

Unfortunately, Morrisons has arrived far too late to the party in these crucial growth areas. Sainsbury competitor has been trading online for more than a decade and now generates more than £1bn of sales annually via this channel alone. By comparison, Morrisons is only set to enter the internet race next January via its tie-up with Ocado announced earlier this year. And I fully expect its more savvy competitors to introduce a vast array of initiatives to spoil the new operation before it even gets off the ground.

City analysts expect earnings per share to droop 8% during the 12 months ending January 2014, to 25p, before staging a modest 4% fightback the following year to 26p. However, this minor projected turnaround is dependent upon Morrisons’ recovery strategy suddenly springing into life and its online operations hitting the ground running. Given that any shoots of recovery remain elusive, I believe that the supermarket lacks a compelling case for investment.

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Still, Morrisons remains a tempting for some dividend hunters — the firm’s new dividend policy announced in September has produced projected yields of 4.7% and 4.9% for 2014 and 2015 respectively. But as I have explained, I reckon that the prospect of significant earnings pressure should deter potential investors from taking the plunge.

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> Royston does not own shares in any of the companies mentioned in this article. The Motley Fool has recommended shares in Morrisons.