Morrisons grows at fastest rate since 2009

Group LFL sales excluding-fuel were up 4.9% in the six months 5 August after an acceleration to 6.3% in the second quarter from the 3.6% in the first. Helped by a speeding up of the wholesale supply partnership with McColl's, boosting second quarter wholesale LFL to 3.8% from 1.8% in the first, saw total revenue swell 4.5% to £8.8bn.

Underlying pre-tax profits increased 9% to £193m, just beating the average analyst forecast of £192m, as operating profit margins were steady at 2.5%.

Reported profits were down 29% to £142m, however, due to higher start-up costs from the McColl's work and from payments to Ocado as part of the development of the new Erith customer fulfilment centre in south London, plus net adjustments including £33m previously announced for successful bond tender offers and £28m following a change in the method used for estimating stock provisions.

Although statutory profits were lower and free cash flow fell to £242m from £352m due to the bond tender costs and lower disposal proceeds than last year, directors expect free cash flow generation to "remain strong and sustainable" in the future and are confident that Morrisons has "many meaningful and sustainable sales and profit growth opportunities ahead".

SPECIAL DIVIDEND, TRENDS AND DEVELOPMENTS

As a result, an interim ordinary dividend up 11.4% to 1.85p was declared as well as a special interim dividend of 2.00p, lifting the total payout 132% to 3.85p.

Chief executive David Potts, who has led a transformation of the grocer since 2015, said: "Strong growth, including our best quarterly like-for-like sales for nearly a decade, together with another special dividend for our shareholders, shows how new Morrisons can keep improving for all stakeholders.

"Morrisons continues to become broader, stronger and a more popular and accessible brand, and I am confident that our exceptional team of food makers and shopkeepers can keep driving the turnaround at pace."

The wholesale supply partnership with McColl's is now expected to achieve the target of £700m of total annualised wholesale supply sales ahead of the initial guidance, with the same aim of reaching £1bn a year in due course. The extra start-up costs from McColls and Morrisons.com in the first half are expected to reduce during the second and beyond.

During the half, the number of branded and Morrisons own-brand items supplied to Amazon's customers across its various channels was increased, with 1,000 items available under the 'Morrisons at Amazon' the same-day store-pick delivery service for ordering and delivery within one hour.

Since the end of the first half, Potts has agreed new deals with two new wholesale supply partners: UK petrol forecourt operator MPK Garages and Big C in Thailand.

Other developments include the Eat Fresh recipe-box service that will debut this week as Potts told reporters the supermarket was looking to keep up with trends in the market and become "more relevant" to millennial consumers. An Eat Fresh subscription will see customers receive boxes of ingredients and recipes, going up against services already in the market such as HelloFresh.

Plans are also being developed with "various partners" to develop foodservice units on surplus land, with a first drive-thru McDonald's opened in August, while almost all stores in the estate now have Amazon lockers, with Doddle parcel collections added to 80 more stores to take the total to 240 and more than 200 Timpson shoe repair and key cutting stands now rolled out.

MARKET REACTION & ANALYSIS

Shares in Morrisons, having leapt 26% in the last six months, fell in early trading on Thursday but were soon back to par, at 267p.

After the maiden special dividend, house broker Shore Capital said it now forecast a recurring 6.0p special dividend and upgraded its FY2019 pre-tax profit estimate by 0.5% to £412m and for FY2020 by 1.1% to £448m.

The quarter was exceptional in more ways than one, said market analyst Neil Wilson at Markets.com, as the second quarter was up against "a prior year comparative period that did not include a World Cup and some pretty exceptional summer weather that undoubtedly boosted food and drink sales at the expense of clothing and electricals".

"So while these were very strong numbers and reason to cheer, we must assume this to be a one-off growth rate that will level off very sharply. The market reaction indicates that investors don’t really know how to read these results as the World Cup has distorted the underlying picture," he added.

Wilson wondered where can Morrisons go from here, amid intense pressure from discounters and Tesco's own discount chain looming, which will make further pressure on margins seemingly inevitable. "Finding new growth avenues like the Amazon tie-up and wholesale business are important but the key remains the core product offering, which Morrisons seems to be pitching just right at the moment. Shares have had a good run over the last two years as investors have finally bought into the Potts story, little movement today on what appears to be one-off results.”

Societe Generale eyed "disappointing margin trends", with 1.0bp erosion in the EBIT margin reflecting the speeding up of wholesale supplies to McColl’s and increased investment in store-pick and the new Erith CFC for Morrisons.com.

SocGen continues to think the stock is overvalued, "not least given the poor EBIT margin trend in 1H after an already poor FY17/18 at -7.0bp", with a shares trading for 21 times 2019 expected earnings versus a P/E of 20x for Tesco and 16x for Sainsbury’s.

All in all, the update has delivered more positives than negatives with this update, said market analyst Richard Hunter at broker Interactive Investor.

"There are, however, some hints of caution. The company’s traditional weakness in terms of its convenience store and online offerings are still lagging in comparison to its larger rivals, whilst the proposed merger of Sainsbury and Asda will heap additional pressure on an already fiercely competitive sector."