Morrisons fares better than feared in fierce market

Customers at supermarket chain Morrisons are watching the pennies, bringing like-for-like sales growth grinding to a halt, but the group still managed to grow underlying profits.

In the half-year to July 29th the supermarket leviathan saw sales rise 2.3% to £8.9bn from £8.7bn at the interim stage last year, bang in line with the forecast by Charles Stanley. Total store sales increased by 1.3% including a contribution from new space of 2.2%.

However, LFL sales, excluding value added tax (VAT) and fuel, fell 0.9% year-on-year as customers put fewer items in their shopping trollies.

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"With ongoing commodity inflation continuing to weigh on already fragile consumer confidence and market conditions becoming ever more challenging, we have had to work even harder for our customers during the first half," admitted company Chairman, Sir Ian Gibson.

Underlying profit before tax edged up 1% to £445m from £442m in the corresponding period of 2011, but statutory profit before tax of £440m was down from £449m the year before. Charles Stanley had forecast profit before tax of £430m.

Underlying earnings per share rose 10% to 13.09p from 11.91p the year before, paving the way for a 10% rise in the interim divide to 3.49p from 3.17p, in keeping with the group's previously stated intention to increase divi payments by at least 10% a year in each of the three years to fiscal 2013/14.

The group's shares buy-back programme, which has seen equity of £628m retired, was largely responsible for net debt rising to £1,580m at the end of July from £1,055m a year earlier. Gearing at the end of the period stood at 32%, up from 20% at the end of July 2011.

The group expects the challenging economic environment and consumer pressures to continue through the second half of this year and into 2013, but remains confident of meeting its expectations for the current fiscal year.

The statement contained some interesting observations on how shoppers are reacting to the uncertain economic environment. "They are putting fewer items in their baskets, buying only what is needed and seeking to avoid waste," Morrisons said, adding that customers are trading down to own-brand products to save a few bob. As a result the own-label product category is gaining share in 63% of categories, compared to 46% in 2011, according to market research group Kantar Worldpanel, with "value" own-label ranges growing the fastest at 13% in the 12 weeks to May 13th.

Morrisons is pleased with the development of its "M" savers range, launched earlier this year as part of its increasing emphasis on establishing an own-label brand that is "worth switching supermarkets for". The group said it is on track to meet its objective of relaunching 10,000 own brand products by January 2014.

Encouraged by the success of its Fresh Formats programme, which aims to increase the proportion of fresh foods sold in its shops, Morrisons will be rolling out a further 38 conversions in the second half of the financial year, while testing further evolutions of the concept.

Having complained in the trading statement about rapid expansion of selling space by supermarkets in the UK contributing to subdued growth rates, Morrisons said it is reducing its new space target by 200,000 square feet to 500,000 feet for the current financial year and by 300,000 square feet next year. Nevertheless, the group expects to open up to another fifteen convenience stores by the end of this year, as a prelude to accelerating the roll-out programme in 2013/14.

"By the end of the year our new Fresh Formats will be in over 100 stores and we are now ready to launch our convenience stores in London supported by our new distribution centre," Chief Executive Officer Dalton Philips said. "We have also extended our food production capabilities and will launch wine as our first online category," he added.