Morningstar | Wm Morrison Reports In-Line 3Q Sales With Growth From Stores Disappointing; Shares Expensive
No-moat Wm Morrison reported third-quarter results for the 13 weeks to Nov. 4, with group like-for-like sales excluding fuel up 5.6%, supported by the retail (1.3%) and wholesale (4.3%) channels, broadly in line with our full-year expectations. There was no commentary on full-year guidance. We maintain our GBX 208 fair value estimate and continue to expect margin-dilutive growth in online and wholesale businesses to balance out any meaningful volume/mix gains achieved in the future.Contribution from online through Ocado's customer fulfillment centres was 0.3% in the period, supported by an extension of fulfillment capabilities through a second Ocado customer fulfillment centre at Erith and expansion of the company's store-pick online service from 14 to 20 stores in the quarter.
Morrisons' underlying drivers of top-line growth during the period slowed, with number of transactions dropping (up 0.2% versus up 2.6% in the second quarter) and items per basket mildly negative (down 1.5%), in line with the previous quarter.
We are still sceptical on two key aspects of the business: (1) the company’s ability to drive profitable volume growth through its supermarkets (sales growth coming from stores was up a measly 1% in the latest quarter, implying flat or even negative volume growth depending on inflation), and (2) profitability of the company’s few volume growth drivers (wholesale and online), which in our view should be dilutive to the group's margins.
Our fair value estimate is based on an 8.2% weighted average cost of capital and a Stage II EBI growth rate of 2.0%. We maintain our negative moat trend rating, as we expect continued margin and profitability pressures triggered by stronger competition, the company’s limited channel exposure, and the disruptive growth of hard discounters.
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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