Today’s interim report from supermarket chain WM Morrison Supermarkets (LSE: MRW) sent the shares down and they are more than 5% lower as I write.
At first glance, the figures look quite good. Like-for-like sales excluding fuel notched up 3% compared to a year ago, underlying earnings per share jumped almost 15% higher, and the net debt figure declined by 22% to £932m. The directors signalled their optimism with a 5.1% hike in the dividend.
Turning around?
Chief executive David Potts has it that “a new Morrisons is beginning to take shape,” and says the firm is making “strong headway” with its plans to Fix, Rebuild and Grow. However, I reckon the very fact that a turnaround strategy was required in the first place speaks volumes about the challenges facing the supermarket industry from the continuing onslaught being delivered by fast-rising discounters such as Aldi, Lidl, B&M European Value Retail and others.
Looking at Morrisons’ valuation, I’d say that the market’s turnaround expectations are ahead of reality, which could account for the share-price weakness today. At 232p, the stock trades on a forward price-to-earnings (P/E) ratio of more than 17 for the year to January 2019 and the forward dividend yield runs at almost 3%. Considering City analysts following the firm expect earnings to grow 14% to January 2018 and just 9% the year after that, I think the valuation is rich.
Rates of growth are important
Supermarkets are not fast-growing beasts, especially when they are operating in what I see as a market that is being disrupted by a new breed of food retailers. I’d be happier if Morrisons’ P/E rating was closer to 10 than it is and with a dividend yield starting at five or above.
Meanwhile, Warpaint London (LSE: W7L) delivered interim results today and the shares are down more than 14% as I write – ouch! The supplier of colour cosmetics and owner of the W7 brand aspires to fast growth but the financial figures are a little disappointing. Compared to a year ago, revenue inched 3.7% higher and underlying profit before tax ticked up 1.3%, but cash from operations fell off a cliff at £0.04m compared to an inflow of £1.46m the year before.
Cash flow funds growth
The cash flow deterioration seems to be due to a big increase in trade and other receivables and an increase in inventories. That could be a sign of a growing business serving more customers or it could be a sign that the firm is having trouble getting paid for stock it has supplied to customers. The company points to payments for inventory before the end of the half year to support increased Christmas gifting business during 2017 and says management continues “to monitor trade receivables and stock levels as the business continues to grow.”
One of the things I like about Warpaint London is that the firm carries no borrowings. Another is its international reach with sales going to the major markets of the UK, Europe, the US and Australia. The firm reckons strong Christmas orders are ahead of last year and I’m inclined to give the firm the benefit of the doubt on growth and see today’s share-price dip as an opportunity to buy the stock cheaper.