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Morrisons dispels the doubters

Morrisons not only surprised the market with an unscheduled trading update but with its content too, which included the magic words 'the company’s full year results will be ahead of its earlier expectations'. By Glynn Davis, City editor


Morrisons dispels the doubters

This prompted a flurry of pre-tax profit upgrades from analysts who had previously pencilled in 670 million for the 2010 financial year but have now pushed-up their estimates. Bank of America has increased its forecast to 750 million and Cazenove has pushed its estimate up to 729 million.

Morrisons' Q1 statement also dispelled the belief it had been boosting sales by price cutting at the expense of profits as

it stated gross profit margins are expected to exceed the original plan by 0.4 percentage points.

This was a result of both better than expected improvements from the company's Optimisation Plan and volume growth, which is leading to supply chain benefits (cheaper prices from manufacturers). The latter is proof that Morrisons continues to attract new shoppers - keen to experience its much-vaunted fresh food 'Market Street' ranges that incorporate butchers, bakers, pie makers etcetera.

The company revealed that Market Street sales rose by a double-digit percentage in the first half, with some categories such as oven-ready fresh foods showing even greater rates of growth. Morrisons has also worked hard to make its promotions and pricing especially attractive at a time when customers have been tempted to cross the thresholds of the hard discounters.

Marc Bolland, chief executive of Morrisons, has successfully pulled off the trick of leveraging the company's heritage of keen pricing and a strong focus on fresh, helped by the fact it is unique among the major supermarkets in manufacturing many of its own foods and rearing its own cattle.

Into this mix he has added a much greater focus on segmentation that had dogged the company when it took over the Safeway business. Stores in the south of England stocked exactly the same goods as in its Yorkshire heartland and former Safeway shoppers deserted the stores once they were converted to Morrisons.

There is now a much more tailored offer to each local area and this has helped it attract back a lot of those original shoppers, which is partly why the company has continued to add to its customer base.

This combination of old and new characteristics has not been lost on analysts with Bank of America suggesting the company had kept the best of its old DNA (Sir Ken Morrison) and is benefiting from a strong infusion of the new (Marc Bolland).

The impressive Q1 statement clearly shows that the strong run Morrisons had been enjoying is anything but coming to an end and that concerns over whether it was buying its volume uplifts have proven to be unfounded.

This had been holding back the shares, which have declined by four per cent over the past quarter and led to an underperformance against the market, but the positive news today has helped them regain lost ground with a nine per cent increase to 275p. This pushes them closer to their 12-month high of 293.25p achieved back in September.

Having proved the doubters wrong once, what is to say that Bolland won't continue on this path? He certainly seems to have the momentum with him at the moment as evidenced by the news yesterday (July 20) that the OFT will not be referring Morrisons' purchase in December of 30 stores from the Co-operative Group to the Competition Commission. It is frequently proven to be a risky strategy to bet against momentum.

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