Morrisons quarterly sales fall faster as price-cutting intensifies

Third-quarter like-for-like sales at Morrison Supermarkets fell at a faster rate than in the previous quarter and worse than forecast, mostly due to deflation from its part in the grocery industry's price war.

On the upside, chief executive David Potts reiterated his previous guidance that underlying pre-tax profit would be higher in the second half than in the first and made optimistic sounds about progress elsewhere in the business.

In the 13 weeks to 1 November, total sales excluding fuel were down 2.0% and like-for-like (LFL) sales were down 2.6% - compared to a LFL sales decline of 2.4% in the second quarter and 2.9% in the first, and consensus forecasts of -1.5% and -2.1%.

Including fuel LFL sales fell 5.1%, with total sales down 4.6% reflecting the materially lower prices at the pumps.

As the supermarket industry competes ever more fiercely on price, Morrisons reported deflation excluding fuel of 2.2% for the quarter and 5.3% on a two-year basis.

The FTSE 100 retailer reduced the number of vouchers it issued as part of Potts' ongoing drive for simplification, which hit year-on-year Q3 sales by 2.4% and by more towards the end of the quarter.

Potts, who joined in February, said: "The business is moving at pace on the long journey towards improving the shopping trip for customers.

"Our priorities for the rest of the year are unchanged - to stabilise trading, reduce costs and further improve the capability of the leadership team. We are making good progress in many areas and customers are noticing improvements."

After the recent closure of 11 supermarkets and sale of 140 convenience stores, net new space sales growth was contributed around 0.5% to total sales, making for a 2.0% fall in total in-store sales.

House broker Shore Capital expect the new contribution to ease further through the fourth quarter with management guiding to a 0.6% contribution for the year as a whole.

Analysts there expect the headwind from vouchering in comparisons with last year will be largely worked through by the start of the next financial year and have held full year expectations steady for PBT of £300m and EPS of 9.6p.

Most other analysts were more disappointed with the numbers, though Societe Generale noted that the "only good
news" is tight control of cash as net debt at year-end 2015-16 is now seen ‘lower’ than the group’s previous guidance of £1.9-2.1bn.

Bank of America Merrill Lynch said it now believes the Morrison recovery "will take longer than initially expected", but maintained its 'neutral' rating.

"The pull back by the group on bringing its IT up to date with competitors (in particular, putting the sales ordering system on hold) combined with the ongoing risk of some price irrational behaviour being triggered in the UK, make us cautious," it said.

Getting into the Guy Fawkes spirit, independent analyst Nick Bubb said: “The circa 4% share price rocket yesterday implied that today’s Q3 update from Morrisons would produce some fireworks, but the -2.6% LFL is a bit of a damp squib!

“Morrisons blame 2.2% food price deflation and reduced vouchering (claimed to have knocked sales by 2.4%), but the plan to 'stabilise trading' still seems a bit remote, even though the new CEO Dave Potts says, rather lamely, 'we are improving the shopping trip and serving our customers better'.”