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BULL VS BEAR: Morrisons: follow the bear or take the bull by the horns?

It was all going so well for Morrisons ... and then the market took a dislike to today's results. Over-reaction or justified response? There's only one way to decide...

Bear and bull
Bear and bull ... coming to a lasagne near you

The Wm Morrison Supermarkets PLC (LON:MRW) bandwagon hit a big bump in the road today, so is it time to bail out?

Ian Lyall (shops at Tesco and Sainsbury's) puts the bear case.

John Harrington (shops at Tesco for the big stuff, the Co-op for the little stuff and cat food) puts the bull case.

Follow the bear

Gone to Potts

You have to applaud the turnaround enacted by David Potts, the CEO of Morrisons, who has dragged the business back into profit, cut debt and increased the dividend payment.

Bravo.

Operationally he has done a decent job. But do I buy into the turnaround story? No, I don’t. Yes the share price is up 16% in the past year as Potts and his team have built up a head of steam, but if you pan out and look at the five and ten year charts they tell an altogether different tale.

They reveal these short lived highs are often accompanied by by deep and painful troughs - it’s almost as if Morrisons was a cyclical stock (remember its supposed to be defensive).

The story has been a familiar one since the mid-noughties when founder Sir Ken Morrison was cajoled into acquiring Safeway, which had always been a basket case. Okay, it had a couple of good years under Carlos Criado-Perez, who had enjoyed some success with his high-low strategy, before it was put up for sale.

Safeway suffered an identity problem; none of the shopping public knew what it stood for. Was it discounter, upmarket, mid-market, hypermarket, mini-market?

And to an extent Morrisons suffers the same problem, particularly in the south-east.

Beyond our Ken

Some will say the late Sir Ken made a mistake acquiring Safeway and I would concur. Instead of heading south, he should have bolstered his stronghold in Yorkshire and the north-east and waited for Sainsbury or ASDA to come a knocking.  But he didn’t and that’s history. 

What we have today is a business, a little like Safeway of old, that doesn’t know whether it is Arthur or Martha.

By that I mean it has lost the value for money crown to the discounters Aldi and Lidl, and is sub-scale.

Morrisons has market share of 10%, which isn’t bad. But is dwarfed by Tesco on 27%, followed by Sainsbury and ASDA, who are in the late-teens.

So its distribution network and buying power are inferior to its bigger rivals so it has to sprint just to keep up with the big boys. And make no mistake with wafer thin margins this is a scale game.

Food fight

Now for the bigger picture. If you look at the food retail industry over the years (as I have for two decades and counting) it is a little like the Middle East. By that I don’t mean to demean or diminish what’s currently occurring there or has historically taken place.

The analogy is this: food retail is an unstable, volatile environment punctuated by periodic price wars and the occasional uneasy peace.

It will never change. There will always be some upstart spoiling for a ruck.

Looking at the industry trends, home delivery is growing (Morrisons is a lightweight in this department).

At the same time this internet boom means that most shop-owners are holding assets (i.e. store property) built hastily in 1990s and 2000s that now isn’t generating the returns set out when company borrowed heavily to build them. Arguably Tesco and Marks & Spencer have the biggest problem, but Morrisons will also suffer.

Oh and then there are the everyday problems - imported inflation, pensions costs, economic slowdown, yada, yada, yada.

So who would buy into all of that?

Apparently John Harrington would.

Take the bull by the horns

Welcome to the 20th century, Morrisons

We may be one-sixth of the way through the current century, but it seems like Morrisons has only just moved into the latter part of the 20th century, doing away with fax machines and ledger books.

It still has plenty of catching up to do on its rivals in terms of embracing modern technology, but that leaves plenty of technology levers CEO David Potts can pull.

Perhaps the most important one is catching up on the competition in the online space.

Morrisons resisted going online because it is extremely difficult to make money at it. That may be true, but it is also difficult to maintain market share without an online presence, and Morrisons belatedly woke up to this realisation.

It got into bed with online shopping delivery specialist Ocado as a means of quickly catching up with its supermarket rivals, then hooked up with Amazon to offer a service called Morrisons at Amazon, so it has definitely got the message.

It’s a bit like when you introduce your ageing Mum to Facebook, and before you know it, she’s spending 16 hours a day online.

Eat my shorts

Traditionally, Morrisons has been one of the most shorted stocks – that’s where traders sell shares they don’t own in a company in the hope of buying them back cheaper later on – on the FTSE 100.

The 21% increase in the share price over the last six months has caught the shorts with their trousers down, forcing them to buy shares to close out their positions.

The doubters were no doubt perturbed by the apparent inexorable rise of the deep discounters such as Aldi & Lidl, even though they are only, by and large, moving into the space vacated by Kwik-Save.

Kwik-Save? I vaguely remember them.

Precisely.

The general consensus was that the established UK supermarkets were at a loss how to respond to the threat, especially Morrisons and Asda, which arguably trade more on their reputation for low prices than Tesco and Sainsbury.

Morrisons decided to bite the bullet. It sacrificed margin to deter its loyal customers from defecting, and it seems to be working.

Like-for-like (LFL) volume has now been positive for seven quarters in a row.

Despite tougher prior year comparatives, LFL volume strengthened to 2.5% in the fourth quarter, with the LFL number of transactions also strong at 4.6%.

Online contributed 0.6% to fourth quarter LFL sales in 2016.

The deep discounters are still growing, of course, but the more they do so, the less concerned the Competition and Markets Authority (aka the Monopolies Commission) will be about further consolidation in the sector.

If Tesco can get away with acquiring Booker, maybe Sainsbury's (for example) could solidify its still patchy presence up north with a takeover of Morrisons.

Quick facts: WM Morrison Supermarkets PLC

Price: 182.6 GBX

LSE:MRW
Market: LSE
Market Cap: £4.39 billion
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