A few weeks ago we asked whether Morrisons was running out of steam. The answer now seems to be yes'.
We all know that consumers are finding it difficult to make ends meet. But this kind of environment should have played into the hands of a retailer like Morrisons, which prides itself in offering great value.
The fact that it hasn't, suggests that something more worrying is going on. Let's take a look at the main issues.
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Morrisons' like-for-like sales growth (so excluding new stores etc) has been slowing for the last nine months. And the picture has just got worse now like-for-like sales are falling.
Meanwhile, recent industry sales data from Kantar WorldPanel was awful, with Morrisons lagging its rivals by a significant margin.
Like for like sales growth (%)
This seems odd. During the 2008 recession, Morrisons was a clear winner. It offered cash-strapped consumers what they wanted and it gained market share.
So what's gone wrong?
To an extent, the broader picture has changed. Competition has heated up. Discount chains such as Aldi and Lidl are doing really well, as is the more upmarket Waitrose. Asda has raised its game too.
But that's life in the retail business. Competition is always tough. The point is to keep ahead.
Chief executive Dalton Philips talks about rivals aggressively using vouchers and promotions. Coming from a company that often prides itself on industry leading promotions, I find that quite worrying.
So why is Morrisons failing to connect with customers? The nice thing about supermarkets is that unlike most businesses quoted on the stock exchange, you can visit the company almost any time you want and have a look at what's going on.
And I can say that having regularly shopped at my local Morrisons for the last three years, I am not that surprised to see customers going elsewhere. Based on my own experience, Morrisons has lost its way a little.
Store standards have fallen. The store is still neat and tidy, but it used to be immaculate. Once fully-stacked shelves are now sometimes empty. It takes longer to get through the checkouts as staff costs seem more important than customers (my local Sainsbury's is even worse on this issue).
More concerning are the prices. Prices of some own-label food products have increased by 20% in a few weeks. The end result is that I'm doing more of my shopping elsewhere, and it seems others are too.
To be fair, the company is refreshing a lot of its stores. And if the Harrogate store is anything to go by, it's doing a good job. But this costs money, which will hurt profits if it can't attract more customers.
So can Morrisons get back on track?
It could be difficult. It has a lot of stores in the north of England where the economy seems to be tougher.
Morrisons may also be suffering from a lack of small convenience stores. These shops are becoming more popular as the high price of petrol means that more people are shopping locally. Maybe the company should scale back its plans for opening more supermarkets, and increase its focus on convenience stores?
Morrisons might also want to consider stopping its share buy-back. In the last year it has spent £491m on buying 168 million shares at an average price of 292p. It plans to spend a further £500m doing this.
Yet, given that the share price is now 279p, this looks like a bad use of shareholders' money. Perhaps that £500m would be better spent lowering prices?
So should you buy? At 279p, the shares trade on 9.8 times 2012/13 forecast earnings, but these earnings now look at risk. Morrisons is not yet a broken business, but its loss of market share is clear evidence that something is wrong. It needs to sort this out quickly.
The company should pay a dividend of around 11.8p per share, giving a yield of 4.2%. That seems to be the main attraction of the shares for now. As I said last time, I'd hang on to the shares for now, but I wouldn't be buying more.
Disclosure:Phil Oakleyowns shares in Morrisons.
Phil spent 13 years as an investment analyst for both stockbroking and fund management companies.
After graduating with a MSc in International Banking, Economics & Finance from Liverpool Business School in 1996, Phil went to work for BWD Rensburg, a Liverpool based investment manager. In 2001, he joined ABN AMRO as a transport analyst. After a brief spell as a food retail analyst, he spent five years with ABN's very successful UK Smaller Companies team where he covered engineering, transport and support services stocks.
In 2007, Phil joined Halbis Capital Management as a European equities analyst. He began writing for Moneyweek in 2010.
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