Morrisons relies on wholesale as store growth slows

With the supermarkets business slowing and the wholesale business accelerating 4.3%, group like-for-like sales were up 5.6% in the 13 weeks to 4 November, excluding fuel. Management said it expected a slowdown in the absence of sunny weather and World Cup football, but analysts were expecting 6.1% growth after the 6.3% seen in the second quarter.

Retail LFL growth declined to 1.3% from 2.5% in the second, with transactions only growing 0.2%.

The wholesale business has been a crucial element to accelerating group growth this year, boosted by a deal with McColl's convenience stores at the start of the year. Wholesale growth picked up to 4.3% in the third quarter, picking up from 3.8% in the second quarter 1.8% in the first.

In the coming quarter a new wholesale contract will begin with MPK Garages, which will take the wholesale total to more than 1,700 convenience stores, including its own forecourts.

A grocer to his core, chief executive David Potts, who has now overseen three years of positive LFL growth, was keen to gesture at the company's fruit and veg display, highlighting the strong trading from the 'Naturally Wonky' range, with more loose local produce introduced in stores during the quarter, "which is proving popular with customers and removes unnecessary plastic". Further keeping with the times, an expanded offer for vegan shoppers launches next week with "vegan logos" on over 300 products.

Another highlight of the quarter was the launch of the Morrisons More app, a new smartphone-based means of collecting and redeeming loyalty points. In other digital developments during the period, the online shopping relationship with Ocado saw its partner's new 'customer fulfilment centre' at Erith in south London begin to provide home delivery services from Morrisons.com, while store-pick online service were added from six more stores to take the total to 20.

Shares in the group fell more than 4% to 243.8p in early trading on Tuesday, having risen more than 16% since the start of 2018.

"Sales were behind expectations, with transaction growth in Morrisons supermarkets barely visible, and so the market has taken a red pen to the share price," said Laith Khalaf, senior analyst at Hargreaves Lansdown, noting that the wholesale business is holding growth up, which is lower margin but is strategically is important given the round of re-invention ongoing in the supermarket sector.

"The discounters are still applying pressure, particularly at the value end of the marketMorrisons trades in, so there’s no time to sit on any laurels."

Goldman Sachs noted that retail ex-fuel LFL growth of 1.3% was below consensus of 1.8%, while within retail online sales contributed +0.3%, a step up from +0.2% in the second quarter. Wholesale LFL was in line with expectations.

Goldman analysts said that while no material changes are expected in consensus PBT estimates for the full year, the strong performance of the shares this year and the retail LFL miss were likely to result in some profit taking.

Having spoken to management on Tuesday morning's conference call, Societe Generale said management had mentioned that retail volumes were positive but declined to comment on full year consensus, which is for underlying PBT of £409m but "said that, if they were uncomfortable with consensus, under regulatory disclosure requirements they would be obliged to make a statement to that effect".

SocGen added: "We see growing investor concern about wage inflation in the sector."