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Morrisons first half numbers to finally inject life into share price

Morrisons last trading update in July surprised the market and led to double-digit earnings upgrades from analysts but this has not resulted in its shares following a similar upwards trajectory. But this could be about to change with its forthcoming first half results on September 10. By Glynn Davis, City editor

GENERAL MERCHANDISE

Morrisons first half numbers to finally inject life into share price

Morrisons last trading update in July surprised the market and led to double-digit earnings upgrades from analysts but this has not resulted in its shares following a similar upwards trajectory. But this could be about to change with its forthcoming first half results on September 10. By Glynn Davis, City editor

There has been an ongoing disbelief that Morrisons can keep its strong run going - which has seen it deliver industry-beating sales growth for a number of months over the last year or so - and this has resulted in analysts being conservative with their rating of the business. At a current price of 282.6p they trade on a PE of 12x earnings for 2010/11.

Admittedly the shares did move ahead by nine

per cent after the July announcement but they have failed to build on this and have gone sideways with the result that Morrisons has underperformed the FSTE All-Share index by 6.5 per cent over this period. This is part of a general weak performance by the food retailers, with the sector down over 3 per cent during the past year, compared with the general retailers' impressive increase of 25 per cent.

There are some optimists out there including Credit Suisse. Its enthusiasm for Morrisons revolves around the expectation that it can deliver improved operating margins. It reckons several areas of the business have yet to be fully optimised including own label, distribution depots and IT.

The broker is convinced that even the progress made recently has not been factored into the Morrisons share price and points to the fact the group is likely to have exceeded margins of five per cent in the first half, which has not been seen since the Safeway integration wreaked havoc on the group's metrics.

The first half numbers are also likely to reflect the benefits Morrisons' is continuing to derive from its ongoing Optimisation Plan that is improving its range segmentation and driving cost savings. The figures will also include less than anticipated of the expected 40 million integration costs associated with purchase of a batch of Co-op/Somerfield stores as the majority of these units will not be trading until the second half.

Such is the strong proposition of Morrisons (with its combination of credibility on food and sharp pricing) that it seems largely unaffected by the flip-flopping of consumers between value and premium. The latest till roll figures show Waitrose on the up whereas the discounters continue to experience a slowdown in sales growth from their peak at the end of 2008. Whatever the figures reveal for the next quarter it seems likely that Morrisons will continue to attract an increasingly broad cross-section of shoppers including many newcomers.

Attracting new shoppers has been a feature of the tenure of chief executive Marc Bolland and there is still plenty to go for judging by TNS research that found the supermarket's loyalty level among its customers is lower than 10 years ago. This is put down to its expansion into the south that reduced its emotional affinity with its loyal northern customer base.

There have been few signs that this has affected hard sales in the north and as the company continues to build loyalty levels in the south with new customers then further sales growth looks highly likely. The first half numbers next week will be yet another signal that Morrisons is delivering on this and could be the necessary prompt to finally get some momentum behind the share price.

glynnd@theretailbulletin.com

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