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Can Wm. Morrison Supermarkets plc Become The UK’s Whole Foods Market, Inc.?

morrisons“Just the way you like it” is the motto of Morrisons (LSE: MRW). They have a very similar story to Whole Foods Market in the United States. A smaller grocer by scale than its competitors, it uses its petiteness to gain a better foothold of its own business model.  Whole Foods is known in the US as the grocer that takes great strides to ensure the safety and quality standards of the foods it offers.

In a society run by processed, antibiotic and hormone-laden foods, American society has begun to take notice of what is contained/added in their foods by paying a much closer attention to food labels.  In similar fashion, there’s a culture generating here in England with consumers being more cognisant of where and how food bought is produced. If Morrisons is able to intersect both mindful eaters and thinner budgets, as well as tackle the debt load they’ve brought on, they should be able to gain more of a foothold.

As an American visiting the UK, Morrisons has been one of the most interesting retailers I’ve come across.  Much of its food — produced and sold — is made either on site or through its owned and operated manufacturers.  That is not something that you see every day – and as a grocer, this allows them more control over the quality of the produce and foods that are sold.

But, similar to America, the UK is having to straddle the needs of a cash-strapped public as well as a food-conscious consumer.  This fact has snipped at profits in 2014, pulling profits margins down by 7%.  On the upside, it looks like Morrisons has pioneered the path to engage both markets and perhaps marry them.  Considering the financial climate influencing the market, Morrisons has done a great job of retaining colleague engagement, which I gather means they have done a good job at addressing these issues to employees and remaining faithful to the company’s core values.

Currently, Morrisons has developed and widened the Morrisons Local shops across the southeastern part of London.  Ninety convenience stores were launched in 2013, which constitutes nearly half of new stores opened in the last year.  They’ve also launched 107 full store fronts in 2013.  By enlarging their field of influence southward, management clearly hopes that earnings will start to pick up. Also, at the beginning of the year, it launched its new children’s’ clothing line, Nutmeg, which has been received well by the public.  The direct impact sales of Nutmeg haven’t been fully realised, but I anticipate parents will find it rather convenient to purchase necessities for their children.  As a parent myself, I am curious and delighted to see where this takes them (I wish the entire Kiddicare acquisition had been able to solidify for Morrisons).

But I cannot go without mentioning the big elephant in the room – its debt load.  Hopefully, they realise the burden of its own debt and have taken strides to reduce the liability responsibilities to at least in relation to EBITDA.  They do have quite a bit of illiquid assets to help offset that debt, which is something to keep in mind to their favour.  The annual report does list business strategy discrepancies as a risk and uncertainty, so it’s comforting that they are aiming at continuing the path that’s currently chosen.  A red flag causing me to further examine the debt would be if they needed to refinance – especially due to further decrease in profits.  Fortunately, the percentage rating of their debt is relatively small compared to current ratings estimates.

Similar to Whole Foods, they have a very grand story and purpose — one that a food conscious and good business-minded person would take a liking to. The business aims at generating value to its customers while tackling the mindfulness of food quality – and growing geographically in an area that has the potential to turn its earnings trough (and thus, debt load) upside-down.

Morrisons is interesting as a turnaround or deep value situation, but it's not an ideal fit for income investors right now. Meanwhile, an attractive small cap opportunity has caught my eye. The Motley Fool's lead smaller companies analyst has discovered a £250m hidden gem which could double profits within the next four years.

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Corrina Quader has no position in any shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.