Master invester Report19 Sep 2016 21:04
Morrisons: Leaner and meaner after turnaround
BY ROBERT SUTHERLAND SMITH19 September 2016
Morrisons: Leaner and meaner after turnaround
Wm. Morrison was a buy! You heard that message here last month ahead of these first-half results, and in the face of a massive uncovered bear position. (Clearly, too many hedge fund managers shop at Harrods and not Morrisons!) The grocer has managed to keep its customers happy, and the share price has responded in kind. At last, a UK supermarket you can believe in.
When I declared my conviction last August that Morrisons was on the right track, the share price was 192p. Today, after the half-year results, the share price is (last seen) 216p. That is a spectacular monthly increase of more than one eighth. You would be forgiven for thinking that this was a growth stock, not a struggling supermarket retailer in a life-and-death battle with discounters and others for market share.
So one asks the question: “Where have they gone right?”
The Q2 and H1 results
In follow-up to the theories I promulgated in my August note I now recite the facts from the company results themselves.
First, Morrisons not only improved top line sales revenue in the second quarter (excluding fuel sales and VAT) by 2 per cent, they did so for the third consecutive quarter! That is a good pattern after a year or two of difficulty.
On the back of that, the company turned in an 11 percent improvement in underlying profit before tax and a 35 per cent increase in underlying earnings per share, which was a little less than the 13 per cent increase in statutory profits before tax.
A more efficient use of capital whilst cutting costs and debt
Management also secured its stated intention to work its capital more economically by significantly reducing its level over two years. Net debt was also reported to have been reduced by some 37 per cent over two years, notably below the target set for such a reduction. As a result, the interim dividend was raised 5.3 per cent to 1.58p. All this is gratifying, if not thrilling, stuff from a company in an industry under the cosh of fierce competitive price deflation.
More to come
We are also informed that this is a process of continuing dynamics because cost savings will now exceed the £1 billion target set for this year. In an itinerary of attractive improvements we are told to expect £2 billion of free cash flow six months in advance of the previously stated target and further improvement in net debt – which is expected to have more than halved by next year. It is indeed an almost astounding contrast from what we might have expected from a business where lowering prices (or ‘investment in customers’, as we now call it) has been an unavoidable necessity. It seems that Wm. Morrison can do both.
A differentiated business model
There are two things about the Morisons business model that need to be taken on board. First, it is one of
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