Shares in Morrisons have moved higher despite the supermarket group unveiling a drop in first quarter sales, hit by promotional vouchers at rivals like Tesco and Asda.
The company said like for like sales in the last 13 weeks were down 1% excluding fuel. Consumers are struggling, with the current economic troubles and the high price of commodities such as petrol putting pressure on disposable incomes. Tesco's attempts to regain ground after its recent profit warning are also hitting sales at its rivals. Morrison said the first quarter performance was in line with expectations, given the circumstances, but it remained cautious about the outlook. It expected promotional activity to remain high this year, but it was being selective about its use of vouchers.
Even so the supermarket's shares are up 2.4p at 282.4p, with the figures more or less in line with City expectations. Richard Cathcart at Espirito Santo said:
Morrisons may be seeing a negative impact on sales from the aggressive vouchering being undertaken by Tesco and Asda (£5 off a £40 shop) but this statement from Morrison is likely to reinforce the broadly negative sentiment towards the sector – vouchering isn't a sustainable strategy in our view, and is clearly unhelpful for margins.
In a tough environment, we think that Morrisons has the greatest scope for self-help as it continues its efficiency drive in IT, distribution etc. We also like the ongoing store trials, although management will clearly need to reassure that this strategy can draw customers in from the competition given the weak first quarter sales figure.
Cathcart has a buy recommendation on the business, but Philip Dorgan at Panmure Gordon kept his hold rating, saying:
Morrisons should in theory grow its profits faster than its competitors, because it is smaller, is playing catch up in lots of areas, doesn't have legacy non food problems and it has the benefit of having an integrated food production company. As it narrows its cover, Morrisons could grow its dividend per share at 15% a year. With return on capital employed set to rise over the next three to five years, this is not a bad investment case.
Morrisons is seeking to fill in the gaps in its national store network and this provides a significant top line opportunity, with fewer cannibalisation risks (in theory), than other major operators. It therefore should be able to generate above-average returns for shareholders, boosted at the earnings level by the £1bn share buyback programme. Our hold recommendation reflects the relative uncertainty, given that growth depends upon both new formats and faster expansion. It also involves expenditure on diversification.
Corporate announcements have dominated early trading, as investors nervously await the latest Spanish and French bond sales, as well as the outcome of the European Central Bank's monthly meeting. The FTSE 100 is up 29.75 points at 5787.86, with Smith and Nephew leading the way after the artificial hip maker said a recent restructuring had helped it towards a 5% rise in quarterly profit.
But mining group Antofagasta has fallen 44p to £11.15. The Chilean copper miner said first quarter production fell 13% in the first quarter, hit by maintenance and damaged equipment at two of its key mines. It also raised the cost of its new mine Antucoya.
BG is down 38p at £14.13 on profit taking after a 55% rise in net first quarter profits to $1.27bn. It also announced the $1.8bn sale of its Brazilian gas distribution business Comgas to the country's Cosan group. Tracked Mobile Crusher Ball Mill application
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