Morrisons is no basket-case

Morrisons is "back on the front foot". Under-fire boss Dalton Philips, says so. Half-year profits at the supermarket plunged by half, but that was no worse than the City had expected, and sales do appear to be bottoming out. Crucially, the dividend actually increases by 5%, and a three-year plan fleshed out in March has had early successes. Could the turnaround really be underway?

Well, this is certainly more promising stuff. Of course, underlying pre-tax profit of £181 million versus £371 million a year ago, and a 7.4% drop in second-quarter like-for-like sales excluding fuel looks pretty ugly. But, according to Mr Philips, every part of the £1 billion cost-cutting programme is currently on track - £105 million has been achieved already - and the retailer should still generate £2 billion of free cash flow in the three years to 2016/17.

In fact, analysts at Bank of America Merrill Lynch (BoAML) reckon the company is ahead of the game. "We still think Morrisons' recovery plan positions the retailer six to 12 months ahead of its key competitors," says the broker, repeating its 225p price target.

Slashing the number of items it sells - so-called SKUs, or stock keeping units - by over 2,000 since March is a start. Price cuts look to be driving volumes - items per basket fell just 3.2% during the second quarter compared with 5.9% at the start of the year. There are also fewer items on promotion.

And two growth areas for supermarkets - online and convenience stores - are chipping in, too. Yes, Morrisons was embarrassingly late in both these markets, but is now pinning its hopes on both to drive overall market growth in the years ahead. Online, which still lags rival supermarkets by miles, is expected to generate £200 million of annualised sales and cover 50% of UK households by March 2015.

And after opening 17 M local convenience stores during the period, Morrisons is on track to open 60-70 this year and next. By year-end, the sales run-rate should hit £300 million, slightly less than previously anticipated as some proposed stores didn't come up to scratch. Still, the target remains 100 new M local stores per year from 2015/16.

Increasing the dividend by 5% to 4.03p is certainly a bold move, and keeps the supermarket's shares on a prospective dividend yield of 7.7%, according to BoAML. Remember, Tesco has just slashed its payout by 75%.

Crucially, Philips has maintained forecasts, too. Look for full-year profits of between £325 million and £375 million. True, an ongoing price war makes it incredibly difficult to confidently predict that Morrisons' troubles are over - far from it. But there's little reason here to alter the view that, barring any disasters, Morrisons shares are beginning to look better value.

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