There were several notable things about Wednesday’s interim results from Wm. Morrison Supermarkets (LSE: MRW) (NASDAQOTH: MRWSY.US).
One of them was the frequency with which the term ‘on track’ appeared, along with ‘previous guidance’.
Morrisons is right to focus on sticking to its previously declared plans: any hint of disappointment or backtracking would be savagely punished by investors, as Morrisons is very much on probation with the markets.
Interesting numbers
Morrisons’ numbers weren’t so bad: the supermarket has now returned to profit, with an underlying pre-tax profit of £181m for the first half. This suggests that the firm’s full-year guidance of £325m to £375m is realistic.
The big question was whether Morrisons would maintain its uncovered dividend: the answer appears to be yes. The interim dividend rose by 5% to 4.03p and Morrisons confirmed its intention to pay a total dividend of not less than 13.65p this year, giving the shares a whopping prospective yield of 7.8%
Stronger financials
There was other good news too: net debt fell by 7.4% to £2,608m, while working capital — the difference between current assets and current liabilities — fell by £145m, mainly as a result of better stock management at depots.
This is good news, as it means that less of Morrisons’ cash flow is tied up in funding its day-to-day operations.
What about sales?
Morrisons’ sales are still falling. Like-for-like sales fell by 7.4% during the first half, although new stores provided a 3.0% boost which offset some of this decline. The firm’s operating margin fell to 3.38%, reflecting heavy price cutting.
However, Morrisons makes an important point, which I suspect Tesco will echo later this year: widespread price cuts and constrained consumer spending mean that supermarkets are operating in a deflationary environment. Customers are paying less and buying less, so turnover is falling even when market share remains unchanged.
Even Waitrose is feeling the pinch: the upmarket supermarket reported like-for-like sales growth of just 1.3% on Wednesday.
This is why Morrisons’ target is to achieve volume growth, which would show that it is regaining market share from its competitors, albeit at lower profit margins.
A recovery buy?
Overall, I think that Morrisons’ turnaround plan has some credibility, and the firm’s shares rate as a potential 3-5 year recovery buy.
However, some risks remain, not least of which is that Tesco’s forthcoming turnaround plan will blow Morrisons’ price cuts out of the water, and regain some market share from its northern competitor.