Morrisons returns to profit as Amazon deal looms

The company has a three-phase recovery plan: 'fix, rebuild and grow'. A crucial objective of the first phase was to stabilise the decline in like-for-like sales. Towards the second half of last year underlying sales started to improve, growing 0.1 per cent thanks to a bumper Christmas period, against wider industry deflation of 3 per cent. For the year as a whole, excluding fuel and VAT, like-for-like sales fell around 2 per cent.

Another part of phase one was saving money. The group wants to claw back up to £1bn in cost savings by the 2017 financial year, and chief executive David Potts is confident the company will achieve this, especially now it has started closing underperforming stores. Last year, property sales generated £300m and contributed £131m to profits, while capital expenditure fell from £520m in FY2015 to £365m. Full-year cost savings came in at £423m, bringing the two-year total to £647m.

Now the group is moving into the second and third phases of its recovery programme. This involves priorities including staying competitive, serving customers better, improving local services, expanding the range of services on offer, making the company more efficient and bringing its superstore estate back up to scratch. Over time, this could add a further £50m-£100m to underlying pre-tax profits, although lower interest costs should help on this front, too.

The group's preferred measure of underlying profits, which exclude the hefty £1.3bn impairment charge booked in FY2015, fell 27 per cent to £302m as the top line sagged. Analysts at Shore Capital expect pre-tax profits of £330m for the year ending January 2017, giving EPS of 10.6p, compared with £302m and 9.6p in FY2016.