2020 was a challenging time for retailers as Covid-19 lockdowns and a sharp economic downturn hit consumer spending. Not even companies in the classically-robust grocery sector were immune to the pandemic as costs spiralled. It’s a theme which one major FTSE 100 supermarket laid bare today.
On Wednesday, Morrison (WM) Supermarkets (LSE: MRW) announced pre-tax profits more than halved in its last fiscal year to January. At £201m, profits were down 50.7% from the previous year.
Covid-19 costs hammer profits
Morrisons said it booked £290m worth of coronavirus-related costs last year. If it hadn’t been for these exceptional expenses the firm would have made £431m profit, it said, up from the pre-tax figure of £408m recorded in the previous year.
Total Covid-19 costs were around £10m higher than the company advised in January. Morrisons said this was prompted by an uptick in staff absentees in January, although it noted this problem is steadily receding. Other extraordinary expenses the grocer endured last year included extra payroll costs, the rollout of store safety measures, distribution costs and the closure of its cafes and deli counters.
Like-for-like sales at Morrisons actually rose strongly last year as Britons were forced to stay in and cook at home. These were up 8.4% year-on-year (excluding fuel and VAT), swinging from the 0.4% fall recorded in fiscal 2020. And like-for-like sales at the FTSE 100 retailer rose by 9% in the final three months of last year.
Morrisons also had its solid online business to thank for the strong sales increase. Internet-generated sales tripled year-on-year, it said, with capacity rising fivefold in that time.
FTSE 100 firm expects to fight back
Commenting on the results, Morrisons said: “Our business has reacted and responded very well throughout the pandemic, and both our absolute and relative trading performance has been consistently strong.”
It added: “We are confident we can continue our momentum into the new year, and expect both profit growth and a significant reduction in net debt.”
Indeed, net debt spiralled to £3.2bn last year from £2.5bn in financial 2020.
So what now?
It’s perhaps no surprise that staff absences have begun to reduce in recent weeks. It comes at a time when Covid-19 infection rates in Britain are falling as vaccines are rolled out. But I think it’s too early to claim that Morrisons is over the hump. Cautious optimism is in order. Though surging coronavirus cases in Europe suggest that an end to the pandemic isn’t quite in sight. More heavy costs could be booked in this new fiscal year.
As a long-term investor however, I’m more concerned by the impact of rising competition on Morrisons’ future profits. FTSE 100 supermarkets have steadily lost customers to new entrants Aldi and Lidl in the physical world and Amazon in cyberspace. And this is putting their ever-thin margins under increasing pressure amid rampant price slashing. This means I’m happy to leave Morrisons on the shelf and invest in other UK shares today.