48 Reasons Why Wm. Morrison Supermarkets plc Is A Conviction Sell

In this article I am looking at why Wm. Morrison Supermarkets (LSE: MRW) is set for further earnings pain.

Earnings collapse expected to continue

A backcloth of rising competition and lasting pressure on customer wallets continues to whack Morrisons. The supermarket has proved unable to stem the tide of nosediving annual earnings growth, and last year actually posted its first earnings drop for many moons with an 8% decline. And City analysts expect things to get a whole lot worse before they get better, and predict that earnings will collapse 48% in the current 12-month period.

Latest Kantar Worldpanel figures released last week underlined the heavy weather Morrisons is facing against the competition. The firm’s total market share dropped to 11% during the 12 weeks to April 27, the consultancy noted, down 0.6% from the corresponding 2013 period. Morrisons was also forced to swallow a 3.6% drop in till takings.

And Kantar noted the levels of extreme discounting that Morrisons, along with Tesco, J Sainsbury and Asda are having to engage in just to limit the continued market share erosion of recent times. The consultancy says that ‘the proportion of sales on promotion currently stands at 45% among the big four. By contrast, the figure at Aldi is just 3%.’

So at the moment Morrisons and its peers are engaged in an extremely precarious balancing act, where heavy promotions are morrisonsneeded to stave off discount retailers such as Aldi and Lidl but which are seriously undermining margins — indeed, Morrisons saw operating margins slide 40 basis points last year to 4.9% last year. So the retailer’s plans to introduce 1,200 price cuts under new its ‘I’m Cheaper‘ initiative is hardly unlikely to prove a miracle fix.

To be fair, Morrisons is also taking drastic steps to address the problem of slumping sales, from the introduction of its online channel in January through to boosting the number of its M Local convenience stores across the country. The retailer opened a further 11 of these outlets during quarter one alone, and hopes to have 200 up and running by the close of the year.

But until these measures show signs of turning around the supermarket’s ailing fortunes — like-for-like sales slumped a hefty 7.6% during the first quarter — I for one will not be staking my investment cash in the firm.

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