One Reason Why I Wouldn’t Buy Wm. Morrison Supermarkets plc Today

Today I am looking at why I consider Wm. Morrison Supermarkets (LSE: MRW) to be an exceptionally risky stock selection.

Grocery sales continue to drag

Enduring pressure on consumers’ spending power, combined with vast competition growth in the British grocery space, has led to significant sales weakness across the middle-tier of the industry. Indeed, recent Kantar Worldpanel data showed total grocery sales in the UK rise just 1.7% in the 12 weeks to 25 May, the lowest rate of growth for more than a decade.

So far Morrisons has been the biggest casualty of the mid-ground grocers, as the supermarket ‘price wars’ have heated up and morrisons prompted customers  to shop around for bargains. And by the looks of things further problems are in the offing, even though the business been extremely active in implementing heavy discounting across hundreds of its products.

Rather, these measures have simply eaten into the firm’s operating margin in recent times. This fell to 4.9% in the year ending February 2014 from 5.3% the previous year. I expect the firm’s move to slash prices on a further 1,200 products at the start of May to result in further pressure.

And while Morrisons’ initiatives have undoubtedly failed, the march of bargain-basement retailers such as Lidl and Aldi have continued apace, helped by the quality and excellent pricing of their products. Indeed, Kantar numbers showed sales at these outlets rise at an eye-watering annual rate of 22.7% and 35.9% respectively during the 12-week period. By comparison, till activity at Morrisons drooped 3.9%.

Furthermore, Morrisons’ price drops have also had nil effect on the rise of high-end chains such as Marks and Spencer Group and Waitrose, firms that are compounding the fragmentation of the UK grocery market. Indeed, the latter saw sales leap an impressive 6.1% in the three months to 25 May, its strategy of maintaining a premium image to stand out from the competition clearly paying dividends.

Morrisons’ plans to initiate vast cast-cutting across the business — the firm intends to slash £1bn from the costs column over the next three years — are likely to have little impact while sales continue to collapse. And although the business also intends to invest heavily in the white-hot growth areas of online and convenience store retailing, these sub-sectors are already dominated by the likes of Tesco and J Sainsbury.

Until Morrisons comes up with a truly inspiring strategy to turn around its ailing fortunes at the checkouts, rather than follow the crowd and hope for the best, I believe that further earnings pressure is on the cards.

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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.