UK supermarket Wm Morrison Supermarkets (LSE: MRW) released its latest trading statement (PDF) this morning. This covered recent trading for the 14 weeks to 9 May 2021. Although the Morrisons share price rose until 1pm, its was pulled down in the afternoon by wider market weakness. But I think MRW shares might have the potential to recoup their 2018 highs.
Sales leap 5.3% at Morrisons
In its latest trading figures, the UK’s fourth-largest supermarket revealed total sales (including fuel) were up 5.3% year-on-year. Like-for-like sales (excluding net new space) were up 2.7% excluding fuel and up 4.7% including fuel. But supermarket sales from March to May 2020 were volatile and erratic, with lockdown causing panic buying and dramatically reduced fuel sales. Online sales more than doubled (+113%), while wholesale like-for-like sales were ahead more than a fifth (21%). Notable hot spots were Easter, Mother’s Day, and improving food-to-go sales. Yet the Morrisons share price has actually fallen over the past 12 months.
Looking ahead to 2021/22, Morrisons said it was, “on track for strong future profit growth and low debt.” It forecast, “profit before tax and exceptionals to be higher than the £431m we would have achieved for 2020/21, had we not waived the £230m business rates relief”. Obviously, voluntarily returning £230m to HM Treasury put a big dent in the group’s bottom line. The Bradford-based business also expects “another year of meaningful profit growth in 2022/23”. But the Morrisons share price is also lower today than it was five years ago.
The Morrisons share price has rebounded since Halloween
At its five-year peak, the Morrisons share price topped 267p in late August 2018. But it declined markedly over the next two years. By 5 November 2020, MRW shares had closed at a low of 161.75p. As I write, they trade at 183.95p, up less than a seventh (13.7%) from their Bonfire Night bottom. But I’m hopeful that the stock has further to go, perhaps even back to its 2018 highs?
Why would I buy MRW today?
I would buy at the current Morrisons share price of just under 184p. Why? Because, recognising that it was not performing so well, Morrisons introduced its Fix, Rebuild, Grow, Sustain strategy. This aims to improve profitability and cash flow, plus reduce net debt. With lower COVID-19 costs expected (£27m in the first quarter), the group says that, “cash flow will be strong, and debt will fall”. It also expects slightly higher profit in 2021/22, followed by “meaningful” profit growth in 2022/23.
To me, the business is going in the right direction, but the Morrisons share price is lagging behind. One hopeful hint came from this statement: “We now intend to refresh our long-term capital allocation plans”. To me, this hints at higher shareholder rewards (perhaps in the form of share buybacks, special dividends, or dividend increases). Meanwhile, the current dividend yield of 3.8% is higher than the wider FTSE 100 index’s.
Of course, optimistic and bullish forecasting is part and parcel of corporate life. But what happens if sales growth doesn’t rebound when cafés, delis, and salad bars reopen? After all, group revenue grew by a mere 0.4% in 2020/21. And what if the hoped-for ‘summer of sport and sun’ doesn’t arrive? Or there’s yet another protracted supermarket price war? Then Morrisons sales might disappoint. Even so, as a conservative value investor, I’d be willing to buy at the current Morrisons share price.
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Cliffdarcy has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services, such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool, we believe that considering a diverse range of insights makes us better investors.