Morrisons’ shares fell 5 per cent yesterday (14th September) due to higher investor expectations and concerns over slowing growth. However, GlobalData believes that the supermarket’s positive momentum will continue into the medium term and future opportunities.
There are four areas which could be contributing to the 5 per cent fall in share price that we have seen since results were released.
Concern that Morrisons has plateaued
Given that Morrisons has been the strongest UK food retail stock over the past 12 months (+27%), share-holders may have lost confidence that Morrisons can continue to grow at such a strong rate and maintain the level of efficiency improvement that we have seen during 2016 and 2017. We would disagree, and see further opportunity to grow retail sales above its peers. We forecast 3.4 per cent retail sales growth excluding fuel for Morrisons for calendar year 2018 versus Tesco at 2.8 per cent; Sainsbury’s at 2.7 per cent; and Asda at 2.5 per cent.
Free cash flow dropped during H1 2016
For Morrisons, a cash flow drop is to be expected as it continues the high level of investment to improve its supply chain and customer offering. Cash generation is strong given that Morrisons is in a transformation period, and is further strengthening the strongest balance sheet of the big four.
Sales, excluding fuel and VAT, were only up 2.6% for the half
Compared to our expectations of Morrisons growing 3.4 per cent for the 2017/18 financial year, 2.6 per cent is a touch light. However, Morrisons is well-placed to take advantage of the extra volumes and ATV that Christmas drives. Christmas sees a shift towards premium ranges, and Morrisons’ The Best range is being extended throughout 2017, with 1,000 items due to be on the shelves by December, a 100 per cent increase in the number of products currently in the range. The Best has enjoyed a c38 per cent sales volume uplift in H1 2017/18, and is likely to gain momentum towards Christmas.
Morrisons’ average basket size shrank 6.2% in H1 2017
Morrisons is not alone in suffering declining ATV and is adapting to consumers’ needs with its partnership with Rontec to provide 50 Morrisons Daily stores in forecourts by 2018. As a result, we think that although Morrisons does not own its own convenience stores, its capital-light approach to tapping into the convenience market will ensure that it benefits from its high growth.
Overall, Morrisons is in good shape to out-sell its competitors – partly because it is coming from a low base of poor trading performance prior to 2016 and still has many self-help opportunities – but also because it has focused on diversification, differentiation, and adapting quickly to consumer needs.
