Morrisons’ trading a worry in ‘un-investable sector’

By Michael Stones contact

- Last updated on GMT

Morrisons faced 'a Goodnight Irene' challenge if like-for-like sales fall in the fourth quarter, warned Shore Capital
Morrisons faced 'a Goodnight Irene' challenge if like-for-like sales fall in the fourth quarter, warned Shore Capital

Related tags: Shore capital analysts, Retailing, Morrisons

Morrisons’ trading remains a worry, as the retailer enters a critical quarter in a currently “un-investable” British retail sector, warns City analyst Shore Capital, ahead of the firm’s third-quarter results to be posted this week.

Shore Capital analysts Clive Black and Darren Shirley said: “We expect Morrisons to continue to report trading that is a little short of grim following on from the very worrying minus 7.4% ex-fuel like-for-like ​[LFL] figure recorded in the first half of financial year 2014 …”

The analysts predicted Morrisons would report ex-fuel LFL sales down by between -5.5% to -6.5%. Total sales, after the contribution of new stores, were expected to be about 3–4% lower year-on-year.

Despite their prediction of poor sales, the analysts retained their forecast of a pre-tax profit for financial year 2015 of £325M compared with £719M in financial year 2013.

‘Asda's experience’

Morrisons was “entering a critical quarter”​ they added, as it will take time for the results of the new lower price trading strategy, implemented in in-store in May 2014, to take effect. “We know from Asda’s (Wal-Mart) experience that it took the best part of nine months for its more value orientated and simplified proposition to demonstrate relative and absolute performance in trading terms in 2013.”

Chairman-designate Andrew Higginson faced the challenge of how to replace the retailer’s sustained decline and misfortune with better trading and prospects. Failing that, the retailer – one of the country’s leading forces for progression and growth in the supermarket segment – will become “part of a new middle-ground that more entrepreneurial and powerful retailers feed off for some time”.

Sales must improve if forecasts are to be met. This will be helped by a favourable comparative of -5.6% for the fourth quarter of financial year 2013 and -2.5% for same period of 2012.

“Accordingly, it would be tantamount to ‘Goodnight Irene’ if Morrison’s reported another fall in LFL sales in Q4 against such comparatives with all of the investment in price and associated initiatives in tow.”

‘Tantamount to ‘Goodnight Irene’

Morrisons’ woes underlined the point that the sector amounts to “little more than a motorway car crash for investors”,​ said Black and Shirley. “As such, we suggest that said investors read the warnings signs and still steer clear of British superstores for now.”

But they added that supermarket retailing may be approaching its nadir, particularly if next year results in stronger UK consumer demand, aided by favourable comparatives, lower motor fuel prices and robust employment.

Shore Capital retained its ‘hold’ advice on Morrisons’ stock.

The retailer will issue its third quarter trading results for its financial year 2015 on Thursday November 6.

Meanwhile, Morrisons’ former treasurer and head of tax Paul Coyle has appeared at Harrogate Magistrates’ Court on two counts of insider trading​.

The charges refer to trading in Ocado shares between February and May 2013. The two firms launched a £200M distribution deal in May last year.

Coyle, aged 50, was bailed to appear at York Crown Court on November 24.

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