Morrisons surges as Dalton Philips sacked

You can always judge the popularity of a CEO by the reaction to their departure. Few, then, will have been surprised to see Morrisons shares jump by 5% when the struggling grocer announced under-pressure boss Dalton Philips is on his way out. He's the last of the big three supermarket chiefs to vacate the hot seat in the last six months. Many argue he should have been the first. His eventual replacement must reverse mild festive numbers despite tame comparatives, and decide whether to scrap the dividend.

Although up on recent quarters, total sales excluding fuel fell 1.3% year-on-year in the six weeks to 4 January, with like-for-like sales down 3.1%. Add in cheaper fuel and sales sank 3.6% and 5.2% respectively.

The number of items in its customer's baskets fell 0.2%, an improvement on the 2.4% drop the year before, and the number of transactions improved from -3.3% to -1.7%. And the company has tried to take advantage of changing trends by increasing its local M store - the number of customers doubled this year and hit five million over the six weeks. But even that was behind City expectations.

The supermarket was keen to promote the success of its new Match & More points card, reporting that sign up is ahead of forecasts and customer feedback is "excellent". But Shore Capital finds the idea confusing and reckons only the supermarket's "loyalists" use it.

"Match & More features many components that we believe many customers eschew these days; collecting points and price matching, with the majority of shoppers wanting simple prices. We struggle to see much cohesive evidence of Match & More in store whilst we are concerned that Morrisons 'everyday lower prices' seems to be losing presence."

Morrisons has also decided to shut 10 of its worst performing stores in a bid to cut costs, a far more effective approach than Philips' famous window cleaning ban at the end of 2013, but still a drop in the ocean.

But the City remains largely unconvinced that Morrisons' current offering can compete against Tesco and Sainsbury's, especially following this underperformance over the festive period, with Brewin Dolphin analyst Nicla di Palma predicting Morrisons will lose most share to the discounters Lidl and Aldi.

"With a new Tesco CEO, we consider some form of substantive price action by Tesco a certainty," said Bernstein analyst Bruno Monteyne. "That will disproportionally hurt Morrisons as it is aiming for the same Value segment and amongst the five Value retailers (Aldi, Lidl, Asda, Tesco, Morrisons) it is the weakest one. We therefore think Morrisons will struggle to rebuild margins after this year's large drop. Its medium to long term growth rate is well below Tesco and Sainsbury's as we are not yet convinced that it has a credible online and convenience channel."

Philips reiterated full-year guidance for underlying profit before tax of £335-£365 million, with property disposal proceeds of £400-£500 million, giving year-end net debt of £2.3-£2.4 billion. Shore Capital has slashed its dividend expectations for the year to February 2016 to around 5.5p per share, down from an estimated 13.6p in the financial year almost ended. At 185p, the shares trade on nearly 15 times forward earnings.

"Following this broadly consensual but frankly poor update to the market Shore Capital retains our HOLD recommendation on Morrison’s shares. We await the appointment of a new CEO and so the ongoing strategy to be applied by the group. With extremely favourable comparatives, the risk-reward equation may be looking a little more favourable, but let us not be too clever at this stage."

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