Morrisons swallows the pain

Having understandably prioritised colleagues, customers and the NHS over the last year, preliminary accounts for Morrisons (MRW) were never going to be pretty.

Though the supermarket chain grew its share of a sector that was handed a near-monopoly for several of the 12 months to January, fuel sales were down a third, 407 profitable cafés were forced to close, while the bill for Covid-proofing stores climbed 3.6 per cent on the latest guidance to £290m. That saw underlying EPS slump to 5.9p.

Against this, management attempts to adjust profits before the repayment of £230m in business rates relief to date, feels a stretch. The bottom line shows the negatives outweighed any immediate sales benefit, though the rapid acceleration of an omni-channel offering could ultimately prove a blessing.

Still, other cash flow items for the period highlight the high-wire act that defines the grocery business. Ever mindful of the competition, Morrisons trumpeted the effect of price cuts, “sustained deflation” and the fact that volume growth exceeded sales growth.

Investments in stock availability and Brexit preparedness added £67m, while the luxury of paying smaller suppliers immediately meant a further £45m working capital strain. The combined toll – a free cash outflow of £450m – pushed net debt from £2.46bn to £3.17bn.

De-leveraging is now a priority, having hopes of a special dividend were scuppered.

Progress here, as well as further detail on an eye-catching commitment to net zero carbon emission agriculture by 2030, are the shares’ nearest and brightest re-rating catalysts with earnings also expected to exceed pre-pandemic levels at 14p a share. Buy.

Last IC View: Buy, 177p, 11 Feb 2021