Morrisons profit drops 50% as competition bites

Morrison shares are broadly flat right now after initially rising first thing after reporting sales for the first half of 2014. Underlying profits were hit but the dividend was increased by 5% and payout expectations for the year were confirmed as not less than 13.65p for the full year.

Like for like sales were down 7.4% and overall turnover dropped 5% to £8.5 billion as price cuts failed to stem volume declines. Underlying profit dropped 51% in the six months to August 2 to £181 million with pre-tax profits dropping from £344 million to £239 million.

The company is focusing on enhancing its in-store experience, reducing prices and introducing a loyalty scheme for customers after being hit hard by the discounting chains Lidl and Aldi.

Chief Executive of Morrison’s, Dalton Philips said that  “Although it is too early to see the benefits of the three-year plan in the sales line, Morrison is getting back on the front foot, and implementing change and innovation at real pace throughout the business. We are meeting the challenges of structural change with decisive action and are on track to become a more distinctive value retailer for the next generation of grocery retail.”

For income investors the rise in the dividend is welcome and somewhat unexpected but it is clear that the company’s revenues  and margins are severely under pressure as a price war looms in the event that Tesco’s new Chief Executive, Dave Lewis, begins cutting prices to try and rejuvenate the performance of the UK’s largest supermarket group. Tesco had already cut its dividend by 75% giving it more room to aggressively invest in stores and price cuts.

The UK supermarket sector is a fascinating one to watch with investors in the sector wondering when share prices will hit rock bottom after big falls in 2014. Will Wm Morrison and Tesco turnaround or fall further as the discounters continue to hold sway? Whatever happens in the long term, there’s plenty of uncertainty in the short term.

Contrarian Investor UK

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