Morrisons stuns with knockout Christmas

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Morrisons stuns with knockout Christmas
It was a very merry Christmas for the supermarket sector if Morrisons' (MRW) latest numbers are the right steer. After a torrid time, the grocer has just reported its best Christmas for seven years and now has over a year of like-for-like sales growth behind it.

Boss David Potts is clearly doing something right, and the shares have surged to a three-year high. It bodes well for Tesco (TSCO) and Sainsbury's (SBRY), too, although one broker already makes Morrisons the festive winner.

In the nine weeks to 1 January, like-for-like sales excluding fuel jumped 2.9%, driven by fresh food, alcohol, its premium "Best" selection and Nutmeg clothing range. The number of transactions rose 5.2% on a same-store basis, although fewer multi-buy promotions meant items per basket fell again. Better technology is helping restock shelves to improve availability and reduce stock levels.

Including fuel, like-for-like sales rose 4.7% and total sales by 4%. And total sales managed to rise 2% excluding fuel, despite a large number of store closures.

This is great news for profit forecasts. Management has just upgraded its estimate for underlying pre-tax profit in the year ending 31 March 2017 to £330-340 million, at least 123 basis points above consensus forecasts.

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Good news wasn't limited to stores, either. Better online services underpinned the biggest ever week for sales on Morrisons.com. Unfortunately, online growth slowed - web sales chipped in 0.6% to like-for-like sales in the nine weeks - as its base grew and capacity became more constrained.

Investors may have hoped for a reduced debt target, but management stuck with its £1.2 billion guidance for 2017. Bear in mind, however, that this is nearly half what it was two years ago.

"We believe it is not too early to say that Morrisons has won Christmas, even before Sainsbury or Tesco publish their results," says Credit Suisse research analyst Stewart McGuire.

An active few days

And it's been an active few days for the grocery sector.

Tesco announced yesterday it would axe 1,000 jobs, just days ahead of its own third-quarter results on Thursday. It's undergone heavy restructuring over thepast two years and the latest stage will reduce its distribution centres from 25 to 23.

However, Tesco should create 500 jobs as a result of the changes by the summer. Sainsbury's will publish its own analysis of the Christmas trading period on Wednesday.

We've also just heard that supermarket checkouts had a record Christmas, with grocery market share figures growing at their fastest rate since June 2014, according to the latest Kantar Worldpanel data.

Shoppers spent £480 million more than in 2015 as the timing of Christmas gave them more time to stock up. After 28 months of deflation, like-for-like grocery prices also inched 0.2% higher.

Morrisons has had like-for-like sales growth for over a year and its shares surged 54% in 2016Aldi had its best Christmas ever thanks to sales of cheap prosecco and premium ranges, the discounter announced on Monday. Sales jumped 15% in December.

Morrisons has focused on cutting prices, improving quality and availability of products and customer service. Its latest figures add weight to recent sentiment that the supermarket is no longer in a competitive choke hold from low-cost German rivals Lidl and Aldi.

Chief executive David Potts was parachuted in to revive Morrisons back in early 2015, as the company struggled amid a fierce supermarket price war. Tellingly, this was the first Christmas with the full A-team in place.

Morrisons has been showcasing like-for-like sales growth for over a year now and its share price surged by 54% in 2016 as a result. Add in Tuesday's 9p climb to 249p, their highest since February 2014, and the shares have now risen 68% since the end of 2015.

McGuire is still too cautious to upgrade his 300p target price for the supermarket, however, maintaining his 'neutral' rating on the stock. That said, it will still need to break out of its current trading channel (see chart above) to hit that number.

Make a break stick and the future looks bright for Morrisons' shares.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.