Morrisons repeats growth trick

Commercially, Morrisons' recovery is taking shape, with plenty of hard work generating a second consecutive quarter of rising like-for-like sales following four years of decline. An ongoing price war means the UK's fourth-largest supermarket still has plenty to do, but it is at least on course for a return to profitable growth this year.

Reflecting store closures and ditching its M local chain, total sales excluding fuel slipped 1.8% in the first quarter, although on a like-for-like basis sales inched up 0.7%. Online sales jumped 1% in the 13 weeks to 1 May, helped by its recent tie-up with Amazon.

Chief executive David Potts announced a wholesale deal with the American e-commerce giant in February, plus an agreement with online grocer and existing partner Ocado to run morrisons.com. It's all part of the firm's growth drive, which includes simplifying and speeding up and strengthening core supermarkets.

This focus is paying off and the number of like-for-like transactions jumped 3.1% in the quarter, with volume growth still strong. After a number of new "Food to Go" product launches and improvements, sales from the relaunched sandwich, sushi and snack range jumped 17% on the year.

Its new "Free From" range has also proved popular and, with upgrades both to self-scan and express checkouts, explains a 2.8% decline in items per basket.

Potts admits there is still much to do, but investors shouldn't "underestimate" the supermarket's achievements, says Shore Capital's Clive Black, with progress made on store standards, products and prices.

"Such steps will be familiar to UK grocery watchers of recent times as they are mirrored by Sainsbury ('hold' at 268p) and Tesco UK ('hold' at 161p)," says Black. "Morrisons is, however, also injecting lost but much-needed personality back into its aisles under Mr Potts' mantra of 'food maker and shopkeeper'."

Bosses are keeping a tight grip on finances and the supermarket is on track to cut net debt to £1.4-1.5 billion by the end of the year. In 2015, debt fell by nearly £600 million to £1.7 billion. Total turnover slipped 4.1% to £16.1 billion last year and underlying pre-tax profit reached its target of £302 million.

In less than three months, Morrisons surged by over 50% from December's 15-year low, sparked by dazzling Christmas trading. However, the shares dropped out of this established bullish trend in March and slipped back to 183p Wednesday.

Thursday's initial 5% jump launched the share price back up to 197p, but Morrisons has failed to make a move above 203p stick on three occasions since early 2014. That was when the shares gapped down following a horrible profits warning (see second chart above). There looks to be technical support at around 185-186p.

Although Morrisons' trades on recovery multiples (2017 price/earnings multiple around 17 times), with cash flow strength and balance sheet de-gearing it becomes more attractive than its peers, argues Black.

"With the anticipated return to profit and earnings growth in FY 2017, we also forecast a return to dividend growth; we estimate a full-year payout of 5.74p, covered c2.0x by earnings per share, so a forecast dividend yield of 2.8%.

"We see this first-quarter trading update as another demonstrably positive step forward by Morrisons in its long journey, a journey that is taking the business to a better place for investors, in our view."

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.