Morrison stays on track as McColl’s link-up adds to recovery’s momentum

“In some ways it is a shame that Morrison’s interim results are marred by two exceptional items that knock £61 million off stated profits, as the underlying financial and strategic progress is good,” says Russ Mould, Investment Director at AJ Bell.

“An eleventh straight quarter of like-for-like sales growth, strong momentum in wholesale thanks to the relationship with McColl’s, lower debt and a special dividend are all testimony to the improvement in performance under chief executive David Potts and team.

“This is not to say the Morrison can rest on its laurels. The group is still at risk of finding itself in the squeezed middle of the grocery business, with the discounters Aldi and Lidl attacking it from one side, and Sainsbury, Tesco and Waitrose from the other (and that’s before we find out what Amazon intends to do with its $13.7 billion acquisition Whole Foods.

“But this is why Mr Potts’ work on the company’s competitive position is so vital, as this will determine the firm’s long-term operational – and therefore share price – performance in the long term.

“The push into wholesale via a supply deal with convenience and newsagent chain McColl’s is going well, as Morrison capitalises upon the 2017 demise of Palmer & Harvey. This move is helping to drive like-for-like sales growth to its fastest rate in just under a decade and leaves Morrison on a much better footing in the convenience business, after its failed 2011 to 2015 foray into that area with the M stores.

Source: Company accounts. Financial year to January.

“In addition, the five-year old agreement with Ocado, first struck by Dalton Phillips in 2014 and extended by Mr Potts in 2017, means Morrison’s online services can now reach three-quarters of the UK. Sales via Ocado’s Dordon customer fulfilment centre (CFC) added to overall growth while start-up costs should lessen and revenues grow further at Morrison.com in the second half as the Erith CFC ramps up its throughput.

“That should help operating margins and profit, further boosting cash flow, which in turn will offer Morrisons scope to further reduce its debt (and thus risk) and increase its dividend, either via ordinary or further special payments.

“The grocery business is still by no means easy and the threats posed by online rivals to bricks & mortar stores, and aggressive discounters, are not going to go away.

“But the Big Three are doing a much better job of fighting back than many dared imagine, judging by their share price performance in 2018, as Tesco’s seeks to maximise value from its merger with wholesaler Booker and Morrison’s looks to build on its links with McColl’s and Ocado while Sainsbury develops its online expertise following its purchase of Argos and seeks to consolidate the market via its proposed deal with Asda.

Source: Thomson Reuters Datastream. *From 1 January to the close on Wednesday 12 September 2018

“All three stocks have handily outperformed the FTSE All-Share in 2018 and the Food & Drug Retailer sector is the third-best performer out of the 39 industrial groupings which comprise the All-Share, so they seem to be doing something right after the torrid 2011-15 period, which was characterised by falling profits, dividend cuts and food supply and accounting scandals.”

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