Has Wm. Morrison Supermarkets plc’s Turnaround Begun?

Last week, the headlines were dominated with the news of Tesco’s (LSE: TSCO) profit warning and 75% dividend cut. This news shocked investors and the whole supermarket sector fell in sympathy.

However, last week also saw the release of quarterly sales figures from market research company, Kantar Worldpanel. These numbers showed that Morrisons (LSE: MRW) turnaround plan could be starting to gain traction. 

Revealing numbers 

Kantar’s figures showed that during the three months to August 17, the UK grocery market grew at its slowest pace in a decade, with figures showing total growth of 0.8% during the period. On a company-specific basis, Tesco’s sales dropped 4% year on year and the grocer’s share of the UK food market dropped to 28.8% from 30.2%.

Unfortunately, J Sainsbury (LSE: SBRY) also started to feel the effects of the supermarket price war. The company’s market share falling from 16.5% to 16.4% over the 12 weeks to August 12. That said, Sainsbury’s sales did expand during the period, although the growth was nothing to get excited about. The grocer’s sales expanded an unimpressive 0.3% during the period. 

Surprisingly, Morrisons bucked the trend. Indeed, during the period surveyed by Kantar, Morrisons’ sales jumped 2.4% year on year, compared to the 3.8% as reported during the previous period. City analysts called Morrisons’ performance “the single biggest surprise”. This is the first time that the company’s sales have expanded since November of last year. 

morrisonsTurnaround in progress 

For Morrisons’ management, this news from Kantar is a great relief for the struggling retailer. Management has been working hard to reinvigorate Morrisons’ offering over the past few months and things seem to be paying off.

For example, in addition to the group’s recently rolled out online shopping service, the Bradford-based retailer has recently announced that it will extend opening hours to 6am to 11pm at 230 of its 490 shops.

What’s more, Morrisons has cut prices and rebased its profit margin. The City had estimated that it could as long as six to 12 months before these changes and lower prices started to boost trading. However, it would appear as if customers have already started to take notice.

That said, I don’t believe that Morrisons is about to stage a full recovery, the company still lags its peers in many ways. Specifically, Tesco has more than 10 times as many convenience stores as Morrisons — all of Tesco’s convenience stores offer extended opening hours and can open longer on Sundays.

Dividend troubles

Morrisons’ turnaround is unlikely to save the company’s dividend payout. After Tesco’s recent dividend cut, the market is now betting against Morrisons’ payout. 

And it’s easy to see why. Current City forecasts only expect Morrisons to report earnings per share of 12.1p for 2015, while the company is expecting to payout a dividend of 13.5p per share. Even if Morrisons does make a rapid recovery, it’s going to be some time before the company’s dividend payout is sufficiently covered by earnings per share. 

After the reaction to Tesco's dividend cut, with Morrisons' dividend payout on the chopping block, income investors will want to get out ahead of a possibly payout cut.

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Rupert Hargreaves owns shares of Morrisons and Tesco. The Motley Fool UK owns shares of Tesco. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.