The stock market is indifferent about today’s half-year results report from WM Morrison Supermarkets (LSE: MRW) and the share price has barely moved on the news. But to put that in perspective, investors have seen the shares rise more than 80% since the lows at the end of 2015.
The figures are good. Revenue rose 4.5% compared to the equivalent period the year before and underlying earnings per share moved 8.5% higher. The directors expressed their confidence in the outlook by pushing up the interim dividend by 11.4% and they also declared a special interim dividend of 2p per share, which more than doubles the ordinary interim payment.
A better and better business
Chairman Andrew Higginson declared in the report that “with each passing quarter, the Morrisons team is building a better and better business.” Indeed, there’s evidence that the finances are getting better. For example, like-for-like (LFL) sales excluding fuel and VAT rose 4.9% in the first half of the year and in the second quarter they were up 6.3%. The company lists this progress with like-for-like sales as one of the highlights of the period.
Other highlights include the further penetration of the firm’s internet shopping offering into the south of the country and into Scotland, and progress with a plan to supply McColl’s Retail stores. Since the period ended, the firm has also struck a deal to supply MKP Garages forecourt stores and Big C in Thailand.
Such deals demonstrate that progress with building up the company’s fledgling wholesale business is brisk, and the directors expect to achieve around £700m of annualised wholesale supply sales during 2018, which is ahead of their previous guidance. However, net incremental profit from all of wholesale, services, interest and online was £4m during the period, which compares to a total underlying profit before tax of £177m in the first six months of the year. I reckon that shows how dependent the firm remains on the trading results of its core supermarket retailing operations.
And here are my negatives
Morrisons is three years into its turnaround and I would say that we haven’t got much to grumble about if you look at the rise in the share price over the period. But I can see several ongoing negatives that would make me more inclined to sell the shares now if I owned them, rather than to buy or hold them. For example, the pre-tax profit margin is wafer thin, just 2.3% or so in these results. That’s par for the course in the sector, but the balance between profit and loss is fine and it won’t take much to tip it.
Indeed, the company said in today’s report, “UK food retail continues to be highly competitive and dynamic.” I reckon the threat from fast-expanding discounters such as Aldi and Lidl will continue and Morrison probably can’t meet it head-on by competing on price, which is probably why it seems to be aiming for enhancing the shopping experience for its customers. Meanwhile, the valuation seems high. The forward price-to-earnings ratio for the trading year to January 2020 sits just above 18. I think that’s too rich, so I’m avoiding the stock, and if I owned it I’d sell.
