Morningstar | Morrison's Reports In-Line 1Q Sales, Announces Ocado Partnership Changes; Shares Fairly Valued
Wm Morrison reported a first-quarter sales update for the 13 weeks to May 5, with group sales up 2.4% (versus 2% annual expectations in our model), like-for-like or LFL sales excluding fuel up 2.3% for the quarter, supported by wholesale (up 2.1%) while retail was soft (up 0.2% versus 0.9% annual expectations in our model). Morrison's statement didn't include any comment on guidance. We maintain our GBX 208 fair value estimate.Contribution from online through Ocado's customer fulfillment centers was 0.4% in the period, implying negative 0.2% in-store LFL growth and negative store volume, given positive inflation (1.4% for the 12-week period ended Feb. 24 , according to Kantar). On top of that, Morrisons is the supermarket with the highest proportion of goods on promotion (at 43% according to Kantar for the same period), which we think dilutes consumer's perception of value, particularly as compared with hard-discounter's everyday-low-prices strategy.
Morrisons also announced that Ocado will have sole use of the new Erith customer fulfilment center, or CFC, until January 2021, a move necessitated after the recent fire at the new Andover CFC. Morrisons will return to the facility in February 2021 and won't incur further costs. Morrisons will continue to use Dordon CFC.
We find the announcement as a net negative for Morrisons: First, the grocer will have to partially adjust its online business model for a couple of years (2019, 2020) as a portion of its online sales will now need to be fulfilled through stores, with uncertain impact on margins (incremental costs for new store pick capacity) and service quality (versus Ocado's stremlined CFCs). Further, Ocado will no longer be Morrisons exclusive digital partner, potentially leaving the door open for Morrisons competitors to tap in Ocado's technology capabilities (although details on exclusivity rights for both parties were not included in the announcement).
Morrisons (Wm) Supermarkets is engaged in the grocery retailing in the U.K. Through its subsidiaries, Co.'s principal activities include include the acquisition of food products, property management, maintenance and investment, manufacturing and distributing of food products, insurance captive, preparation and supply of seafood, meat processing, manufacturing of morning goods and bread, produce packer and purchaser, grocery retailer and pharmaecutical license holder. As of Jan 29 2017, Co. operated a total of 491 stores, 334 petrol filling stations, 401 cafes and 118 pharmacies.
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