A year or so ago, crisis-hit Morrisons (LSE: MRW) looked in terminal decline, bedevilled by falling revenues, cash-strapped customers, board in-fighting and the general decline in UK grocery sales.
Morrisons was hit particularly hard by its higher exposure to economically struggling northern areas, and its failure to establish a strong identity elsewhere. It was embarrassingly late to launch its internet channel. Even price cuts failed to boost sales. The company had lost its way.
Upgraded
Yet disaster appears to have been averted, for now. The share price is still falling, but is down just 3% over the last year, which looks respectable against the double-digit drops experienced by its big supermarket rivals. It is even attracting positive reviews from brokers.
New chief executive officer David Potts has been with Morrisons for barely six months but has already inspired broker UBS to upgrade the company, as customers note improved value for money and fresh food credentials. UBS has only upgraded Morrisons to neutral from sell, and lifted the target price 10p to 175p, marginally above today’s price of 168p.
Morrisons isn’t exactly a roaring success. Sales continue to fall, M-Local convenience stores are closing and its 8% bonanza yield is doomed. The 65% dividend cut will reduce next year’s forecast yield to just 3.2%. It has a long way to go, but Tesco (LSE: TSCO) has an even harder journey ahead of it.
Price Cuts
Tesco’s share price is down 18% in the last year alone as the wheel of fortune continue to turn against the once mighty retailer. Its market share is also sliding, as Aldi and Lidl relentlessly grab share, with scant sign that they have hit the growth wall yet.
The pressure on Tesco to cut prices in response will be relentless, but as Morgan Stanley has pointed out, closing the gap won’t be easy. Personnel, depreciation and rent amounts to around 9% of Aldi’s sales income, but a relatively hefty 15% at Tesco. The living wage will only up the pressures on cost. Rents, wages and pensions are all rising, which is the last thing Tesco needs in today’s wider deflationary era.
Shop Or Drop?
Yet Morrisons shows that all isn’t necessarily lost. Cutting space, canning store openings and closing underperforming stores could make Tesco a tighter, leaner operation. Its customers may start to notice incremental improvements in service and availability, as well as lower prices. A planned 25% cut in lines should boost volumes for the 75% of products that survive the cull, and with boost luck margins as well. Offloading its South Korean arm, data analysis business Dunnhumby and Tesco Mobile should bring down net debt.
This isn’t a recommendation to buy Tesco. Frankly, I still wouldn’t touch it myself, especially as there is an outside chance it may have to launch a rights issue. But if you are tempted, Morrisons shows that fightbacks can start from the most unpromising positions.