Hi Bill and Games
Some excellent comments and can fully related to the concerns regarding to the Aldi Lidl challenge.
But with regards to Morrison, Tesco, Sainsbury, Asda. the big four losing customers. True they have had a big wakeup call and in the case of Morrisons they have pulled out all the stops.
How about looking at established Aldis and Lidls and look at the empty shelves? Why when you go into Aldi stores there are empty shelves, could be many, many more customers are using them, or alternatively Aldis etc! Could it be? That the companies are now having logistic problems.
There are many more Aldi stores, in my city they started with one, now there are five. Big logistical problem. Stores are small in relation to the big 4 store setup. They do not carry the variety of produces that the big 4 do. Some Aldi stores are so small they cannot carry their full range of produces and have Special buy quick turn round products selling to free space within the store. Aldis in the early days claimed that they could sell a product before they had paid the supplier. Aldis relies upon quick turnover and restocking so logistics into the future could be a problem. More stores the bigger the problem, increased costs, so into the future, perhaps maybe not as cheap as they are now. More stores more employees and so on.
I believe Morrison are well placed to compete with the likes of Aldi and co and perhaps the small British style small stores will be the ones to fall by the wayside.
"Decline is probably the wrong word though, it's probably more appropriate to use the words "over" and "saturated"..."
Yes, Games, the underlying industry is clearly not in decline - people are still buying food, at a decent clip, and will continue so to do.
But as to where they buy that food.... the Germans are clearly not going away and will continue to take market share, albeit at a reduced rate, most likely. So, on average, the other incumbent players will lose more share, and all will face ongoing pressures on the "top line", of core grocery sales and volumes.
However, as I've argued before, what happens on the top line will not necessarily by mirrored on the bottom line... Having originally underestimated the German advance, we're now seeing multiple initiatives, which are transforming the way they do business, and the cost of it - and at an accelerating rate. Most "big" players are radically overhauling their cost structures, in management and other areas, with sizeable savings... we're seeing a concerted move into Wholesale (led by Tesco and now MRW)... we've seen synergistic expansion into complimentary non-grocery areas (SBRY and Argos).
I think we'll see a lot of more of this... again, I draw the parallel with the widespread (and still ongoing) shake-up in the airline industry, prompted originally by the impudence of the "no frills" discounters - in the end, it's not quite a case of "everyone wins", but the long-term benefits are still enjoyed fairly widely.
And then... I think we see more M&A and core consolidation. Of course, I still see a MRW/SBRY tie-up as the "obvious" end-game, but there are other ways it could play out. And you have to say, if there is anything such as an "attractive" target in this space, then MRW has to be it, with its strong balance sheet of (increasingly) modest debt, higher freehold asset base and big pension surplus, its vertically-integrated operating advantage and its evident recovery in core retailing discipline.
"Games - Just parked in Morrisons car park to nip over the bushes to get to Aldi because their car part is jam packed - lol !!"
You rascal, you... Maybe that's why MRW is still doing pretty well? 'Cos my (limited) experience of shopping at Lidl/Aldi suggests that while you may be willing and able to "nip over the bushes", a high proportion of their clientele are not, by dint of age and/or "nimbleness", and therefore probably resort to just waddling through the doors at MRW...
"One reason for this is that operating profit fell year-on-year, while all of the profit uplift came from lower financial charges; owing to the hard work Morrisons has put in to reducing its debt pile.... Morrisons operating margin slipped a little, from 2.9% to 2.7%, to suggest the competition remains as brutal as ever."
I don't actually buy this analysis - underlying operating profits were actually up y-o-y, albeit nothing spectacular (+3%) and the actual decline in underlying margin was 7 bps... okay, still a decline, but as near as flat as you can get, pretty much.
And I might add, before Games gets worked up about underlying vs reported profits - "underlying" operating profit was actually lower than reported profits for both of the year being reported and the previous period, not normally the way of these things!
For me, the results were remarkably solid, in pretty much every area - and certainly testament to management's assured control. But that said, they also reflect the fact that the industry backdrop remains challenging and is likely to stay that way.
I suspect the SP retrace owes more to a market very much in glass-half-empty mode, overly eager to pick out any minor negatives in a sea of generally good news, but also a feeling that these results perhaps indicate that we've now seen the best part of the restoration to health, with comparatively little still to go for.
I kind of agree with the latter, to some extent anyway... But I am happy enough holding on for now, with the SP slipping a bit below "fair value" and with prospects for further special dividends and/or similar looking pretty good going forward.
Interesting results and more so interesting fall in the SP.
I first bought into WM in Jul 2012 when the SP was £2.65, in hindshight perhaps not the right decission given the falls running into 2014 when the market took a dislike for the company.
Yes tough times for all the supermarkets.
Given what I had learnt about WM I chose to buck the trend and started trading in 2014 on the SP to lower my average price on mmy holding.
Did not want to sell out totally but the dividend was so low. I still had the confidence to know WM would fight back.
Ken Morrison knew how to run a business and although the money expertise didn't like him I had an opportunity to see into what the company were doing.
It's been a long time coming this recovery so although the SP's down this is a buy and hold for me.
Now holding at average price £1.70 so with yesterdays results I am expecting a 6.8% yield given the patience I have had to endure.
After three years of faultless execution during the Potts reign the SP is back exactly where it and Potts started. It's as if all the plus points of reduced debt, pension surplus, wholesale expansion count for absolutely nought. Saving us from the blunderful Dalton means nothing as far as the experts are concerned (it means rather a lot to shareholders of course). I suppose the retail landscape in the interim has become so toxic that standing still and not going under is considered a major coup.
Anyway those who buy for income can be satisfied with a further witty line of that Mould analysis. Best of all, the reduction in debt and the massive pension surplus, means Morrisons and its shareholders can hunker down for a long fight without having to worry about the interest bills it owes to its banks.
""" but investors may want to see earnings from the grocers core day-to-day operations rise before they take a view that the company really is seeing off the threat posed by the discounters Aldi and Lidl"""
Sadly, whilst I do like Morrisons, they have the annoying problem that Aldi and Lidl have a habit of building a unit next to Morrisons and the difference in the fullness of the adjacent car parks is plain to see.
Russ Mould, AJ Bell supplying some reasons for those having a negative take on today's results.
The combination of rising sales, a healthy jump in pre-tax profits, lower debt, an increased ordinary dividend and even a special dividend of 4p sounds very appealing, but investors are still declining to stock up on shares in Morrison. One reason for this is that operating profit fell year-on-year, while all of the profit uplift came from lower financial charges; owing to the hard work Morrisons has put in to reducing its debt pile.
Lower debt means less risk, and that is a good thing, but investors may want to see earnings from the grocers core day-to-day operations rise before they take a view that the company really is seeing off the threat posed by the discounters Aldi and Lidl, let alone more established rivals such as Tesco, Sainsbury and Asda. After all, Morrisons operating margin slipped a little, from 2.9% to 2.7%, to suggest the competition remains as brutal as ever."
""""Expanding on the reason for the special dividend, Potts and chairman Andrew Higginson said: "We are growing sales and profit, and expect that growth to continue to be meaningful and sustainable in the future. We are generating significant levels of free cash flow, which we also expect to sustain."""
Group like-for-like (LFL) sales(1) ex-fuel/ex-VAT up 2.8% (2016/17: 1.9%)
Revenue up 5.8% to £17.3bn (2016/17: £16.3bn)
UPBT(2) up 11.0% to £374m (2016/17: £337m), up 9.5% on a 52-week basis
Underlying EPS(2) up 12.2% to 12.19p (2016/17: 10.86p)
Reported PBT up 16.9% to £380m (2016/17: £325m)
Free cash flow(3) of £350m (2016/17: £670m)
Net debt reduced by £221m to £973m, below our £1bn year-end target
Net pension surplus of £594m (2016/17: £272m)
Return on capital employed increased to 7.7% (2016/17: 7.3%)
Final ordinary dividend of 4.43p, taking the full year ordinary dividend up 12.2%
to 6.09p (2016/17: 5.43p)
Special dividend of 4.00p, taking the full year total dividend up 85.8% to 10.09p
Our policy is for the ordinary annual dividend to be sustainable and covered around two times by underlying earnings per share. The final ordinary dividend will be 4.43p, bringing the ordinary dividend for the full year to 6.09p.
In addition to the final ordinary dividend, the Board is proposing a special dividend of 4.00p per share, taking the total dividend for the year to 10.09p, an increase of 85.8% on last year.
The principles of our capital allocation framework guide us to reinvest to deliver profitable growth and return surplus capital to shareholders. In recent years, we have made strong progress with the turnaround and our Fix, Rebuild and Grow strategy. While there is still much we plan to do, a new Morrisons is now emerging. We are growing sales and profit, and expect that growth to continue to be meaningful and sustainable in the future. We are generating significant levels of free cash flow, which we also expect to sustain. The special dividend reflects our good progress so far and our expectations for continued growth. Looking forward, we will retain a strong and flexible balance sheet. We will be guided each year by the principles of our capital allocation framework in assessing the uses of free cash flow.
Subject to shareholder approval at our 2018 AGM, both the final ordinary and special dividends of 4.43p and 4.00p per share respectively will be payable on 28 June 2018 to shareholders on the share register at the close of business on 25 May 2018.
"The chorus of supermarket watchers hopeful that LSE:TSCO:TescoÂ shares can finally return to the 250p level last seen in 2014 grew a little louder today.First up, Kantar Worldpanel's latest grocery market research showed Tesco and ..."
"Morrison (WM) (LSE:MRW)It's aways tempting to declare a lack of Interest when covering LSE:MRW:Morrison supermarket. In our little part of Argyll, the choice of supermarket is limited to one and, frankly, they can be less than efficient. What ..."
" MORRISON (WM) (LSE:MRW)Â It's aways tempting to declare a Lack of Interest when covering Morrison Supermarket. In our little part of Argyll, the choice of supermarket is limited to one and frankly, they can be less than efficient. What other ..."
Now at 9%. Just another 212 million shares to repurchase and they will have all gone. Every 1% equals about 23.5 million shares. If they don't that's another 212 million divi payments due, guess about 4.15p per share. Are any of them making money on this? Not that any of the long term holders are either, but shorter pain is some compensation.
Publicly disclosed short positions now at 9.87%. MRW has fallen out of the top 10 hall of shame (no.11). How can a seemingly financially robust outfit like this have been just behind CLLN for much of the last two years.
The hedgies seem to be giving up in slow motion. There will be another divi payment along soon enough, plus their loan fees etc.
"From LSE:TSCO:Tesco's recovery to the peak trading test of Argos shops in LSE:SBRY:Sainsbury's, there's plenty riding on updates from the big food retailers in the coming days.Sales in festive week can be double normal levels, but the Christmas ..."
I'm heading to their Weybridge store this morning to buy some spirts
as Christmas presents. It may be my lack of technical literacy, but there
did not appear to be a click and collect option, so unable to check product availability.
I fail to see what DIRECT reference this (or your previous 2 messages) has Wm. Morrison Supermarkets - or am I missing something. I know you mention 'shorters' targeting M & S etc but I think this sort of message should not be on a specific company message board other than those mentioned.
I read this board for COMPANY SPECIFIC comments.
Incidentally, I think Morrison's have got a super team on board right now, and I am keeping my holding for a rise towards 300p by about Jan. 2019 (14 months time) + dividends getting back towards their level of 2 - 3 years ago
When the short and distort maneuver succeeds, investors who initially bought stock at higher prices sell at low prices because of their mistaken belief that the stock is worthless, caused by an effective distortion campaign. At the same time, the S&Ds cover at low prices and lock in their gains.
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1.Do not believe everything you read - verify the facts.
2.Do your own due diligence and discuss it with your broker.
3.Hypothecate your stock - take it out of its street name to prevent the short sellers from borrowing and selling it. (Learn more about doing your own due diligence in our related article, Due Diligence In 10 Easy Steps)
The best way to protect yourself is to do your own research. Many stocks with great potential are ignored by Wall Street. By doing your own homework you should feel much more secure in your decisions. And, even if the S&Ds attack your stock, you will be better able to detect their distortions and be less likely to fall prey to them by selling the stock at a loss.
Holiday Shopping Still Dominates
The busiest period for brick-and-mortar stores is still the Christmas holiday shopping season. This stretch of time between Thanksgiving and the end of the calendar year has become ever more competitive, with brick-and-mortar retailers increasing hours and running near-constant promotions. In recent years, some large retailers have even opened stores on Thanksgiving Day and Christmas Day, which resulted in a fair amount of backlash from customers and employees.
But the picture has not been perfect for online retailers over the holidays in the last few years, either. Procrastinating shoppers who waited until the last minute to order holiday gifts online overwhelmed the package delivery companies that online retailers rely on, resulting in packages delivered late or after the holidays.
So there are plenty of pros and cons for both brick-and-mortar and online stores when it comes to retail's busiest shopping period.
But that's not the end of the story. Amazon.com is now opening its own bricks and mortar stores. they have learned that a significant portion of the population will only by in s store and so the once giant of online is now a back and mortar retailer.
Hi Bill, very much appreciate your view, and reply, as always.
I have KGF on a watchlist, they also have an aggressive share buy back
KGF arguably more cyclical and I noted the recent Homebase figures in the Westfarmers
update(they also own Target in the US from memory) which painted a weak picture imv.
Screwfix looks the jewal in the crown, however they have significantly grown that
business during begine conditions. Would assume there is flexibility in the cost base
should trading conditions toughen, to mitigate at least some of this.
"Which is the better value?... Any views appreciated."
As always, you have to look at the whole valuation picture, from a number of angles - while putting it in the context of the respective market sectors and competitive positions.
On an earnings basis, 13.8x prospective P/E for KGF vs 17.6x MRW... KGF looks the cheaper, prima facie, though hardly that cheap against the market or a challenged retail sector (with valuations that reflect this). And MRW earnings have been in decent recovery for a couple of years, with this forecast to continue - while KGF EPS has been flat-lining in recent times, and will likely be down a bit this year. The inference is you don't have to look too far ahead to see this P/E gap converge - unless something happens to arrest the current trend.
It's a similar story on EV/EBITDA, though the gap somehat narrower - 6.2x KGF vs 7.5x MRW (actual last FY). Again, undemanding relative to the market, but hardly exceptional within a sector abundant with undemanding valuation metrics. Likewise, FCF is attractive for both, though actually more so for MRW currently (10-11% FCF yields last 2 FY) than KGF (around 7% each of last 2 FY) - and there are plenty of big FCF yields across the UK retail sector.
Both have very well-covered dividends - KGF with better EPS cover, but MRW much better FCF cover - yet neither stock is a stand-out income play, with KCF yielding slightly more (3.4% vs 2.8% prospective) but MRW probably offering the better forward growth profile. Not much to choose between them here - but there are plenty of better yield stories elsewhere, even just within their own sector.
On balance sheet strength, you would pick KGF - sitting on significant net cash. But it is hardly a weakness for MRW, with strong freehold asset backing, relatively low leverage (1.4x ND/EBITDA last FY) and the strong FCF likely to reduce this steadily further.
Overall, then, KGF is arguably a bit "cheaper" than MRW, but it depends what you want to focus on, not much in it IMHO - and MRW unarguably has the better operational momentum and financial trajectory at the moment. So perhaps a toss-up as to which is the "better value"... and of course, both are operating in tough markets experiencing both structural issues and fierce competition, neither of which is likely to alleviate any time soon.
Personally, of the two, I would probably buy MRW - but then, I am more impressed by FCF than others might be. And I am not sure either would be that high up a list of "best value" UK retail plays at current prices...
Or so says Shares magazine - which also says Buy at 217.8p.
Full text from today's edition below:
"A downwards drift at WM Morrison Supermarket (MRW) presents a buying opportunity before the grocer unwraps its Christmas trading update (9 Jan 2018). Chief executive David Potts charge has reported an eighth consecutive quarter of like-forlike sales growth, up 2.5% (ex-fuel) in the third quarter to 29 October.
Though representing a modest slowdown on the prior quarter, Shore Capital believes Morrisons enters the forthcoming peak trading period in good shape and on the front foot. Shielding cash-strapped shoppers from the impact of lower sterling, Morrisons Price Crunch and Way Down promotions are pulling in consumers and its Best premium own label range has been dramatically expanded in time for Christmas.
Vertically integrated, the grocer is building out its wholesale business with Amazon UK and forecourts operator Rontec, while preparing to supply neighbourhood retailer McColls (MCLS) from January 2018 in a deal that revives the Safeway label.
Forecasting a rise in pre-tax profit to £365m (2017: £337m) this year ahead of £407m next, Shore stresses Morrisons is a business with a strong financial constitution. Year-end net debt will have fallen below £1bn for a comfortable leverage ratio of 1.1 times, Morrisons has a strong balance sheet with freehold backing, not to mention a progressive dividend and a pension surplus."
Yes SBRY prices steep, even local Waitrose cheaper on many items.
Quality of Morrisons meals.....mmmmm not too sure on that
BIG improvement for Morrisons would be for our local stores to actually consistently have the correct pricing! Twice in the last 8 days been in to local store and a product has been at SBRYs level when in actual fact should have been on promotion at 30% less. Twice I have gone elsewhere only to find out today re the issue. This was the same BASIC issue I flagged up with them and HO last year. In BOTH cases I was promised a call back but nothing materialised....(including the one from HO). IF (or possibly when) MRW can address this issue then they will stop losing sales and progress could be made, but there is enough competition out there to make sure that everyone should be hanging on to whoever comes though the door, not going out with an empty basket.
The contention that it was the Amazon deal which artificially boosted the SP (rather than improved management and performance) doesn't seem to fit with the SP history. The Amazon deal was struck in late Feb 2016. SP closed at 199p after the Amazon news. By June it was back at 175p and stayed lower than that Feb close until September. Meanwhile the shorting interest kept expanding to be over 19% by October/November. Potts was getting on with the job, improved lfl, reduced debt etc.
The recent SP weakness is just part of an overall bearishness on anything retail. Any results which are not above forecast seem to be met by a sell-off.
"Beyond that, there is the medium term M&A theme... pretty sure we will see more of it in Food Retail."
Well I have to say, Morrisons food is far better than anything at Sainsbury or Tesco and their home branded meals are excellent.
It's more the shebang of the market that'll keep dragging it it all down methinks !!
It's not a major fault of MRW as they seem to have steadied the ship, it's just the competition like Aldi, who's food is also generally pretty good with a few exceptions, but they keep slapping up a shop with in yards of MRW, SBRY and Tesco and it's forcing them to compete.
Well in many respects some are not doing so -- everything in Sainsbury is still overpriced, like a standard 500ml bottle of beer (any brand you can think of) starts at £1.8 a bottle and £1.19 in the competition -- so many many products are an order of magnitude more expensive for the same item with the same quantity involved.
"Bill, unsure the valuation differential with SBRY can be justified?..."
Short answer, Essential - it can't. SBRY is cheap relative to MRW IMHO... though less easy to say by how much, and the situation gets more clouded the more you delve into it.
SBRY earnings were down last year, and likely to decline again this year... albeit moderately. MRW meanwhile has delivered decent earnings growth (ie. recovery) for a couple of years now, and this is forecast to continue into the medium term - though at a slowing rate. This divergent trajectory is not enough to square off the current significant valuation (on P/E) gap, but it does explain part of it, and it's understandable that SBRY may struggle to outperform until it proves earnings have bottomed (NB. consensus forecasts an EPS recovery in 2018/19).
On EV/EBITDA, the valuation is gap is still there but more modest (7.6x MRW vs 6.1x SBRY, most recent actual FY), and looks set to close appreciably again this year - reflecting MRW's relatively stronger balance sheet and cash flow profile. Of course, neither looks expensive on this basis, relative to both the market and to TSCO, which trades on over 9x.
And MRW is actually the "cheaper" on FCF yield, 10-11% last 2 FY vs 8-9% for SBRY. This is likely to decline somewhat this year for both, but it's a crucial and under-appreciated metric IMHO, both in absolute and relative terms, and one to keep a close eye on (and of course, both look absolute "cheap" on this measure, around 2x the UK market average).
So overall, I see SBRY trading at a big discount to "fair value", and MRW much less so (albeit getting more attractive now) - but equally, I understand why we'll probably have to wait for any meaningful catalyst to see any sustained narrowing in this differential.
"On a wider market point, just looking at some of the savage (recent) post results sell offs, wondering if this is indicative of a market top, or some significant interim peak forming..."
Yes, certainly suggests a market where further upside will be harder to sustain - but equally, it does show me a market much less likely to crash. With the latter, you tend to see increasingly irrational exuberance in the run up to a correction - yet we are currently seeing the opposite?
"It looks a la la land valuation to me as I've posted elsewhere previously..."
Essential - at the current SP, 11%/10% FCF yields for the last 2 FY... not so much "la la land", more Butlins - cheap and cheerful!?
FCF will likely trend lower this year, but these figures - on an already depressed profit base, don't forget - attest to the medium term potential. With further support to earnings from balance sheet "optimisation" (in due course) as they throw off surplus cash.
"... having said that Amazon may pounce."
Yes, indeed - see my previous post on the "M&A theme". Things will definitely happen in this sector - just not as sure exactly what!
"Based on it's current P/E, it's tiny 2% profit margins, it's modest yield and the massive supermarket comp, wouldn't 150-175 be the right sort of level to take on the risk of the ever growing depletion of the business to the comp?"
Yes, still in MRW, not a huge holding. Not amazed to see it settle back a bit, it managed to defy gravity at a pretty full rating for some time - unusual indeed in this market for anything "UK" or "retail" - and even today it is not massively out of line with 'fair value' IMHO.
I think your price range may be about right, if earnings were now plateauing... and without doubt, the top line and market share will remain under concerted competitive attack for the foreseeable. But I think there is a lot more to go for, on margins and profitability, even on a lower business base... and operational momentum to this end remains very good for MRW, as per last week's trading update, and as it has for a while now.
MRW has specific advantages over peers... the margin opportunity is greater due to their vertically-integrated structure, the balance sheet is better and FCF has been particularly compelling - it is the latter that keeps me invested, more than anything.
But on a risk/reward basis, I can understand anyone hesitating to commit new money... if they can meet forecast expectations over the next 2-3 years (and from the above, I think they can - at least) I think the shares will perform at least fine from here. But I don't see scope for spectacular returns, and there is then the risk that management delivery falters again in a tough environment.
Beyond that, there is the medium term M&A theme... pretty sure we will see more of it in Food Retail. And there are scenarios here which could be very positive for MRW... albeit not all of them, of course! But it is another reason to keep me invested, in a moderate way...
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