Analysts Clive Black and Darren Shirley said: “Some weeks ago we suggested that Morrisons was in an ‘amber alert' situation; that now has moved to red. Rarely have we been so concerned going into a set of final results as we are with this edition.”
The retailer’s sales had fallen at “an increasingly concerning rate” in recent trading periods.
Also, Morrisons’ business model of vertical integration – leading the group to own large sections of its supply chain – was compounding the retailer’s problems of an accelerating fall in in-store volumes. About 25% of the group’s volumes pass through its manufacturing facilities.
“That vertical integration implies further accentuated pressure on margins from negative operational gearing [the effect of fixed costs on the relationship between sales and operating profits],” said Black and Shirley. “So, we foresee the scope for further substantial post results downgrades for FY2015 and beyond.”
The analysts forecast sales this year would fall by 0.7% to £17,670M, with like-for-like sales, excluding petrol, falling by 2.7%.
Morrisons reported like-for-like sales, excluding fuel, down by 5.6% in the six weeks to January 5. Sales are likely to have worsened since then. Nielsen data suggested a total sales fall of about 4% between January to early March. “The irony of such deteriorating trading momentum is that it coincides with the opening of Morrisons’ 100th 'M-Local' store and the commencement of online trading from mid-January,” said Black and Shirley.
Current pre-tax profit was forecast at £722M – after £65M of development costs. Earnings per share were predicted to be 23.3p, an 11.3% fall year-on-year.
‘Need to go back to its roots’
Shore Capital thought the remedy to Morrisons’ problems was “a need to go back to its roots”. Contary to management’s claims, the reason for its underperformance had little to do with under-representation in convenience or online channels.
“We believe Morrisons has ostracised core customers, while failing to attract new footfall in an increasingly competitive market,” said Black and Shirley. “In our view, the key driver of this process has been ‘Fresh Formats’, which was particularly ill-timed given the growing popularity of limited range discounters and high street value stores.”
The retailer needed to implement six actions to stop falling sales. Those included: becoming the cheapest fresh produce player in the market and bringing back supplier support in ambient and household, while cutting promotions and repositioning underperforming own-label products. See the full list below.
Despite significant concerns about Morrisons’ performance, its historical asset support and the scope for beneficial change, should continue to support the shares, said Shirley and Black.
Earlier this week, Shore Capital claimed the latest monthly retails sales monitor, issued jointly by the British Retail Consortium and accountancy firm KPMG, revealed consumers' lack of trust in food prices at top UK supermarkets.
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Six actions to boost Morrisons’ sales
• Be the cheapest fresh produce player in the market; remembering that Morrisons is a wholesaler too, and shout about it.
• Return Market Street to its old glory of theatre; reiterating the advantage of vertical integration.
• Bring back brands with supplier support in ambient and household, cut promotions and reposition underperforming own-label.
• Be self-confident and assertive with marketing and especially price, taking on Aldi, Asda, Iceland and Lidl.
• Scrap the loss-making and, in our view, never to be profitable Ocado venture and fulfil online from store.
• Deeply cut the central overhead.
Source: Shore Capital