(Repeats Monday item)
* Profits set to grow this year after four years of falls
* Like-for-like sales seen rising for third quarter running
* New CEO cuts prices to narrow gap with discounters
* But over 60 pct of analysts rate stock as "underperform"
* Potts needs to cut prices more, analysts say
By James Davey
LONDON, Sept 12 While investors have had their
sights trained on the biggest names slugging it out in Britain's
supermarket price war, one former struggler, Morrisons,
may be embarking on a quiet revolution.
Eighteen months after Chief Executive David Potts took over,
the retailer is on course to return to profit growth this year
after four years of falls caused largely by the rapid advance of
German discounters Aldi and Lidl.
That would put Morrisons, the fourth-largest supermarket
group, on a par with market leader Tesco, which is
expected to post a small rise, and ahead of second-biggest
player Sainsbury which is set to post another fall.
Analysts forecast Morrisons will report underlying pretax
profit of 150 million pounds ($200 million) for the first half
of the year on Thursday, up from 141 million in the same period
But Potts has yet to win over the doubters. Shares in the
firm, which is based in the northern English city of Bradford,
have risen 17 percent in the last year but remain a little below
204 pence, where they were when he joined on March 16, 2015.
Over 60 percent of analysts rate the stock as "underperform".
Morrisons is still losing market share but this is due to
Potts's decision to close about 30 stores and sell a loss-making
local convenience chain. On the measure of sales at stores open
for over a year, he has made significant progress.
The firm has reported two consecutive quarters of
like-for-like sales growth, is expected to report a third on
Thursday and given current forecasts is likely to be the
strongest of the big four, which also includes Wal-Mart's
Asda, on that measure over the first half.
There is also some evidence that the group may be in a
stronger position than its peers to cope with the consequences
of Britain's vote to leave the European Union. More tangibly,
two deals with Amazon and Ocado to sell
Morrisons products online could also boost profit.
Ken Morrison, the firm's boss for half a century and still
its Life President, gives what by his standards is a ringing
endorsement of Potts. "I think he's doing very well, but there's
still a lot of room for improvement," the 84-year-old son of the
company's founder told Reuters.
By contrast, the patriarch of a family that still owns
almost 10 percent of the group once described the strategy
pursued by Potts's predecessor Dalton Philips as "bullshit".
Potts, 59, joined Morrisons after 39 years with Tesco where
he began by stacking shelves. His initial task was to steady the
ship after the group lost ground in its traditional northern
market under Philips.
Potts has slashed prices, narrowing the gap with the
discounters. He has replenished shelves more rapidly, tailored
products to local tastes and improved service with, for example,
more self-scan and express checkouts.
Analysts say he has also improved the look and condition of
the group's 492 stores and sharpened up marketing, emphasising
its army of more than 9,000 trained butchers, bakers,
fishmongers and other specialists who prepare more food in-store
than in other British supermarkets.
The changes appear popular. Like-for-like transactions were
up 3.1 percent in the first quarter, with sales volume growth up
Analysts at Jefferies International, who have a 'buy' rating
on the stock, say the firm is misunderstood.
"Rarely have we seen such a negative combination of views
both from investors and sell siders," they said, noting that
about 21 percent of Morrisons' freefloat stock is on loan for
short-selling by investors who expect the price to fall.
Naysayers highlight the intensely competitive nature of the
British grocery market, saying Potts needs to go even further on
price cuts, and fear a fight back by industry laggard Asda, the
British arm of U.S. giant Wal-Mart.
Morrisons has invested heavily in food production and
packing and now has 14 plants, making it Britain's second
biggest food manufacturer and most integrated food retailer.
While data is sparse, Morrisons says it imports less of the
food it sells than the 40 percent industry average.
This would make it less exposed than rivals to the pound's
fall of 9 percent against the euro and 11 percent against the
dollar after Britons opted for Brexit. Potts has cut prices
twice since the referendum on June 23.
Morrisons also has a very small non-food offer, shunning the
trend of other big supermarkets which sell everything from
coffee makers to washing machines and TVs. With many of those
goods imported, here too Morrisons is less exposed to the
It is also less exposed to the risk of a post-Brexit
economic slowdown and a resulting drop in consumer confidence
which would particularly damage demand for bigger purchases.
Such a slowdown has yet to materialise but remains expected by
Phoenix Asset Management, which owns nearly 1 percent of
Morrisons according to Reuters data, has estimated the firm's
food production capacity has grown to about three times the size
it was a decade ago. However, it says productivity, or volume
growth, has not kept track, meaning it has scope to raise
A wholesale supply deal struck by Potts with U.S. online
giant Amazon in February gives Morrisons the opportunity to
increase volume with little additional capital expenditure,
Amazon's own assault on the UK grocery market is focused on
London, where Morrisons is weak and has little share to lose but
where Tesco and Sainsbury's are strong.
Morrisons is also benefiting from its own belated move
online through a partnership with Ocado, a deal that Potts
re-negotiated, paying less upfront and holding on to more
It also wants to expand the wholesale of its own-label foods
through an alliance with Motor Fuel Group (MFG) Britain's second
largest independent forecourt operator.
BALANCE SHEET STRENGTH
Morrisons has significantly strengthened its balance sheet,
with net debt forecast to be as low as 1.4 billion pounds ($1.86
billion) by the end of its 2016-17 year, down from a peak of
2.82 billion pounds in 2014.
Clive Black, analyst at the group's broker Shore Capital,
says Morrisons stands apart with a lease-adjusted net
debt/earnings before interest, tax, depreciation, amortisation
and rent (EBITDAR) ratio of 2.4 times. This compares with a
forecast of 3.9 times for Sainsbury and 4.6 times for Tesco.
Black said that if trading remains sound and debt reduction
continues, Morrisons may be able to consider something to please
shareholders, such as a share buyback, over the next 18 months.
($1 = 0.7509 pounds)
(Editing by Kate Holton and David Stamp)