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Morrisons enjoys exceptional Q2 but shares fall on hefty one-offs and profit-taking

Morrisons said the wholesale arm overtook the retail division in total like-for-like sales contributions in the first half
Morrisons expects to achieve its target of £700mln of annualised wholesale supply sales

WM Morrison Supermarkets PLC (LON:MRW) announced a special interim dividend as wholesale deals to supply Inc (NASDAQ:AMZN) and convenience store chain McColl’s bolstered revenues.

But two exceptional items, which wiped more than £60mln off stated profits, coupled with some investors cashing in after a strong recent run, saw shares fall 1.4% to 262.1p on Thursday morning.

READ: Morrisons may shun retail mega merger kingmaker role to continue online expansion

The supermarket group, which has been turned around since chief executive David Potts joined three years ago, reported a 4.5% increase in revenue to £8.8bn and a 9% rise in underlying pre-tax profit to £193mln in the six months to August 5.

Like-for-like sales, excluding fuel, gained 4.9%, accelerating from the 3.0% growth reported the same period a year ago. The wholesale arm contributed 2.8% to total like-for-like sales, while the retail division that includes the company’s supermarkets contributed 2.1%.

Morrisons said inflation was broadly flat and volume growth was strong in the supermarkets, online and wholesale businesses. 

Morrisons expects to beat wholesale sales guidance

An initial programme to supply the first 1,300 McColl’s stores was completed ahead of plan after the collapse of wholesaler Palmer & Harvey forced the convenience store chain to find another supplier.

Morrisons said it continued to increase the number of its own-brand items that it supplies to Amazon customers with more than 10,000 products now available for same-day delivery.

READ: Morrisons notches up another quarter of like-for-like sales growth, but margin worries remain

The company now expects to achieve its target of £700mln of annualised wholesale supply sales, ahead of its initial end-2018 guidance, and sees £1bn of annualised sales “in due course”.

Since the end of the first half, Morrison has agreed new wholesale deals with MPC Garages in the UK and Big C in Thailand.

Over the coming months, most of MPK’s 30 forecourt fuel and store sites will be converted into Morrisons Daily stores and Morrisons will begin exporting about 100 of its own-brand items to Big C stores in Thailand.

Morrisons hikes interim dividend by 132% 

The group declared a special interim dividend per share of 2p and an ordinary interim dividend of 1.85p, bringing its total payout to 3.85p, up 132% on the previous year.

The cash outflow from the total interim dividend is expected to be £91mln in the second half.

Net debt since the end of fiscal year 2017/18 has fallen by £44mln to £929mln and is expected to remain at a “low level”. Free cash flow for the first half came to £242mln, including bond tender costs and lower disposal proceeds, compared to £352mln last year.

"Strong growth, including our best quarterly like-for-like sales for nearly a decade, together with another special dividend for our shareholders, shows how new Morrisons can keep improving for all stakeholders,” said chief executive David Potts.

Costs expected to reduce in second half 

The speeding up of wholesale supply to McColl’s, investments in store-pick and a new customer fulfilment centre (CFC) in Erith for led to extra start-up costs in the first half but the company expects these costs to ease in the second half.

It also expects an improvement in its Home and Leisure range after annualising last year’s relaunch of the division.

Following a £233mln bond tender offer in the first half, it predicts underlying net finance costs of £60mln to £65mln for the 2018/19 financial year. 

Exceptional quarter but likely a one-off

“The quarter was exceptional in more ways than one – the Q2 group like for like growth of 6.3% was a nine-year high, but we must also note that this was against a prior year comparative period that did not include a World Cup and some pretty exceptional summer weather that undoubtedly boosted food & drink sales at the expense of clothing and electricals (note John Lewis today),” said analyst Neil Wilson.

“So while these were very strong numbers and reason to cheer, we must assume this to be a one-off growth rate that will level off very sharply.”

He added: “The market reaction indicates that investors don’t really know how to read these results as the World Cup has distorted the underlying picture.”

-- Updates for share price and analyst comment --

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