Morrisons ditches chief executive, but it’s still a ‘hold’ for some

13th January 2015

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Morrisons hit the headlines today as it booted out chief executive Dalton Philips, but The Share Centre is still recommending the supermarket as a “hold” for investors.

The broker said that profits across the supermarket sector are down 15% as the price war with discounters like Aldi and Lidl takes its toll.

Shares at Morrisons jumped by nearly 7% on hopes that a new chief executive could improve its prospects.

Meanwhile Sainsbury’s said it would cut 500 jobs as part of a drive to save £500m over three years.

Ian Forrest, investment research analyst at The Share Centre, said: “Morrisons beat market expectations today with a 3.1% drop in like-for-like sales for the six weeks of the Christmas trading period, excluding fuel. That compares with the 5.6% fall seen for the same period last year and the 6.3% decline in the previous quarter. The company also announced that its chief executive of the past five years, Dalton Philips, is to step down after the year end results are published in mid-March. Profits guidance was maintained at £335m-£365m and 10 loss-making stores are to close in 2015.

“The market welcomed this slightly better news with tentative signs that its new strategy is beginning to bear some fruit. The new Black Friday phenomenon clearly didn’t help trading, but its online channel is performing well and property disposals are set to raise up to £500m this year. Some investors may also be relieved to see that Morrisons is now looking to new leadership given that the shares have fallen 38% since Philips became CEO in 2010.

“We recommend Morrisons as a ‘hold’ given the attractive dividend and longer term contrarian investors may feel the company’s intrinsic value is being overlooked. However, significant headwinds such as poor market conditions, intense sector competition and low investment levels, remain.”

Phil Dorrell, director of retail consultants, Retail Remedy, said: “If other members of the Big Four supermarkets are the squeezed middle, Morrisons is being steamrollered flat. The departure of its chief executive was grimly inevitable.

“With the most dated stores and weakest business strategy of the old guard grocers, Morrisons has haemorrhaged both sales and share to the brash young discounters who took its cheap prices USP, improved it, and then unceremoniously yanked the rug from underneath it.

“Despite a big improvement on a disastrous Q3, Morrisons’s like-for-like sales continued to plummet over Christmas.

“The biggest surprise in these grim results is the decision to close just 10 stores. The brand’s property portfolio is one of few ‘get out of jail’ cards – and it is busy playing it by unloading up to £500million of property assets this year.

Dorrell said that online sales were unlikely to give the supermarket much of a boost as it is too late to the game.

He said: “Falling sales is not the biggest issue, rather the problem is that its sales are falling much faster than those of Sainsbury’s and even Tesco. Dalton Philips will be relieved not to face another bruising AGM; last time he was heckled by his own chairman.

“Despite its multiple problems, Morrisons remains a solid business – or at least it would be if it could get its offer right. It just needs some real muscle to convince people it is attractive again. The marketing over the last few years has been dire, and has done nothing to change its tired public image. The brand needs to be much bolder if it is to recapture the distinctive market niche that it created and then lost.”

Looking across the supermarket sector as a whole, Forrest added: “The seasonal retail flurry has failed to reignite the supermarket sector in the 350, with the other big players Tesco and Sainsbury’s seeing like for like sales fall in the festive period.  The last year has seen UK food retailers struggle, with the ongoing price war with discounters impacting their bottom line as well as market share.

“The food and drug retailer sector is dominated by Sainsbury’s, Tesco and Morrisons, who account for £9 of every £10 generated in profit by the sector. However, squeezed margins have undermined earnings, with annual profits after tax reported in the 12 months to September falling by 15% annually, dropping to £2.5bn. As we have seen with Tesco, falling profits place dividends under pressure, so it is crucial that prospective investors in the sector do their homework before investing.”

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