The warning from now privately-owned Morrisons about the deteriorating consumer sentiment facing the supermarket sector was described as a chilling update by Shore Capital.
Morrisons spoke of developments in the geopolitical environment as well as increasing inflationary pressure having an impact on spending.
The supermarket chain said developments have had an impact on sales and underlying earnings (EBITDA) since the beginning of February 2022 and that it is taking measures to mitigate the impact of these developments upon its EBITDA.
“The sting in the statement is a possible profit warning, Morrison recording that ‘unless these conditions improve, the impact..., could have a material adverse effect on our sales and EBITDA for the year’," Shore reported.
The broker said it is too early to say how representative Morrisons’ experience is of the wider sector; Tesco PLC (LSE:TSCO) is set to report next week and that might be a better barometer for the sector, Shore said.
“We do concur with the Morrison view that the UK consumer market has the basis to notably tighten as essentials inflation in particular bites; however, we have not seen such a bite from February at an industry level, as Morrisons suggests; we expect to happen more noticeably from April.
“Indeed, third party data such as Kantar and Nielsen, reports that on a 1Y [one year] and a 2Y basis, Morrisons is underperforming the UK grocery market. Quite why this is the case is not wholly straightforward to explain, but notable underperformance is evident. Whether this reflects uncertainty within the business as well as the wider market that it comments upon is hard to discern, noting as we do that we are surprised that the financing of Morrisons' future debt under CD&R ownership is taking longer than we anticipated,” Shore said, adding that it had assumed CD&R, which bought Morrisons, would have “had its ducks in a row” and concluded the debt financing by now.
CD&R has been making noises about selling off assets to reduce gearing, with the manufacturing and distribution facilities said to be on the block for £500mln or so.
“For now we see Morrisons highlighting toughening times for the UK consumer, which chimes a chord with our own more cautious narrative of recent weeks. Goldilocks inflation has disappeared, something less manageable for the majority of households is now in place. Whilst so, non-discretionary grocers should be resilient and we reiterate that Morrisons is underperforming the trade. Hence, its update to the market on the 4 April should be read as some and some to us; we sense Sainsbury and Tesco will chime on the market backdrop but not necessarily be as negative in their guidance around EBITDA generation,” Shore predicted.
The broker still thinks the sector’s diminishing number of listed companies offer their usual defensive characteristics and still sees a “UK grocery market where there are favourable economic traits; compound annual value growth that exceeds new capacity, rational behaviour in the main, value-added streaks in the food system, scope for ongoing cost reduction, capital discipline by the superstore players and so strong free cash flow generation”.
“The latter, plus considerable capital to deploy by private equity, is the reason that Asda and Morrison have been acquired by Issas/TDR Europe and CD&R respectively. So, for Sainsbury and Tesco equity, Morrisons' comments are, of course, to be noted and cautionary, but they also need to be set within the context of the current financing matters for the Bradford based group. We also believe that the sector can benefit from profit maximisation steps at both Asda and Morrison,” Shore concluded.
Shares in Tesco were up 1.3% in late morning trading; Sainsbury (J) PLC was unchanged while Marks and Spencer Group PLC (LSE:MKS) was up 0.2%.