Evidence of turnaround boosts share price for UK grocer Morrisons

A Morrisons supermarket is seen in Weybridge, Britain August 19, 2016. Picture taken August 19, 2016. To match MORRISONS-STRATEGY/   REUTERS/Peter Nicholls

Morrisons, Britain’s fourth-biggest grocer, reported better than expected results on Thursday, suggesting a recovery under its new management was gaining momentum and sending its share price sharply higher.

The Bradford, northern England-based group reported a rise in first-half profits for the first time in four years as well as a third straight quarter of underlying sales growth.

It also raised its forecasts for cost savings, cash and the reduction of debt.

The shares rose by up to 9 percent to 211 pence, while those of bigger rivals, market leader Tesco and Sainsbury’s increased by up to 4 percent and 3 percent respectively.

Former Tesco executive David Potts joined Morrisons as chief executive in March 2015 with a remit to steady the ship after the group was badly hurt by the rapid rise of German discounters Aldi and Lidl.

“We’re very much still in the foothills of our recovery programme,” he told reporters.

“But so far, so good, I think our colleagues have played a blinder.”

Potts has reversed Morrisons’ loss of customers to the discounters by cutting prices, improving product quality and availability and bolstering store standards and customer service.

“We are moving Morrisons’ own-brand (product) up a notch in quality and down a notch in price and it’s proving popular with customers,” he said.

Prices on more than 4,500 products have been cut this year, driving a 4 percent increase in Morrisons’ customers in its second quarter year-on-year.

Potts has also overhauled Morrisons’ online strategy through a renegotiated distribution agreement with Ocado and a wholesale supply deal with Amazon.

“It looks like Potts has got the retailer turning a corner. He has put in place a number of initiatives that make a lot of sense,” said Himanshu Pal, vice president at market researcher Kantar Retail.

In the 26 weeks to July 31 Morrisons’ underlying pretax profit rose 11 percent to 157 million pounds ($208 million), ahead of analysts’ average forecast of 150 million pounds.

Sales at stores open over a year, excluding fuel, were up 2 percent over the second quarter, accelerating from a 0.7 percent rise in the first quarter.

Potts said that Morrisons’ supermarket business, stripping out the impact of online sales, was positive like-for-like in the second quarter for the first time since 2011-12.

Net debt was reduced by 477 million pounds to 1.27 billion pounds in the first half, taking debt to below the firm’s year-end target of 1.4-1.5 billion pounds.

That target has now been reduced to around 1.2 billion pounds with debt expected to fall further to less than 1 billion pounds by the end of the next financial ending in early 2018.

Morrisons also said it would exceed its cost savings target of 1 billion pounds by the end of the current financial year ending Jan. 29 2017, would hit its target of 2 billion pounds of free cash flow six months ahead of plan and raised its working capital improvement target by 200 million pounds to 1 billion pounds.

The firm also raised its interim dividend by 5.3 percent to 1.58 pence.

Prior to Thursday’s update analysts were on average forecasting an underlying pretax profit of 313 million pounds for the current year ending in January, up from the 302 million pounds made last year.

Finance chief Trevor Strain told reporters he expected “lower outliers” would review their estimate models.

[Source:- Reuters]