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Morrisons to cut prices after second profit warning in three months Price war fears wipe £2bn off value of UK supermarkets
(1 day later)
Morrisons has issued its second profit warning in three months as it announced a programme of aggressive price cuts to take on Aldi and Lidl. More than £2bn was wiped off the value of the UK's listed supermarkets on Thursday as Morrisons said taking on discounters such as Aldi and Lidl with aggressive price cuts would see slash profits by more than 50%.
The group is also selling £1bn worth of property to pay off debt and fund its dividend. Alongside the disposals, Morrisons announced that it is revamping its stores and cutting prices over the next three years in a £1bn programme, starting with £300m of investment this year. Fears that Tesco and Sainsbury's would also be forced to slash profits to deal with cut-price rivals dragged down their shares by 4.9% and 8.4% respectively. Shares in the online grocer Ocado, which delivers food for Morrisons, and Marks & Spencer also took a hit.
However, the announcement of the fightback strategy was overshadowed by a profit warning, the second since Morrisons revealed poor festive trading in January. Morrisons shares tumbled more than 10% in early trading, dragging Tesco, Sainsbury's and Marks & Spencer down sharply as well. However, Morrisons shares posted the worst performance in the FTSE 100 as a second profit warning in three months triggered a 12% slump.
Morrisons posted an underlying pretax profit for 2013 of £785m – down 13% but in line with analysts' depressed expectations. Revenue fell 2% to £17.7bn and sales at stores open a year or more excluding fuel and VAT fell 2.8%. Morrisons has been hammered by a sea change in shopping habits. It has been stranded as consumers turn away from large out-of-town outlets to online purchases and convenience stores. The grocer is also suffering because it is no longer viewed as one of the cheapest places to shop, it has out-of-date IT systems, no loyalty card and too many shabby stores.
Announcing the profit warning, the company said trading conditions would stay tough and that equivalent underlying profits for the current year would drop to between £460m and £510m. Analysts had expected a profit of about £732m for this year. In a new turnaround strategy, the Bradford-based grocer said it would sell off £1bn of property assets over the next three years to help fund its dividend. Savings and efficiencies also equal to £1bn will be invested in price cuts, promotions and store improvements over the same period, starting with £300m this year.
Dalton Philips, Morrisons' embattled chief executive, said the grocery sector was undergoing its biggest upheaval since supermarkets emerged in the 1950s, with business moving online and the market disturbed by squeezed living standards and the success of low-cost German upstarts Aldi and Lidl. Meanwhile, Morrisons is to pull out of expensive adventures into the children's clothing brand Kiddicare at a cost of £163m as well as the US online grocer Fresh Direct.
"We overlap with the discounters more than anybody else, our customers have felt the austerity programme more than anybody else and these are bold steps to put us back on track. This is the right plan for this business in this landscape. We can't ignore this structural shift." Despite the multibillion pound announcements, the fightback was overshadowed by the profit warning. The company admitted profits would fall to between £325m and £375m in the year to February 2015. Analysts had expected a profit of about £732m for this year.
In a bid to win over shareholders, Morrisons promised to increase its dividend by 5% this year and said it would return more capital to investors in future. The 2013 payout rose 10% to 13p. That follows an already tough year, which saw Morrisons post an underlying pretax profit of £785m for the year to February 2014 – down 13%, but in line with analysts' depressed expectations. Revenue fell 2% to £17.7bn.
The group is selling £1bn of its £9bn property portfolio to boost cashflow for the next three years. It said investment would be funded by reduced capital investment and efficiency savings. Dalton Philips, Morrisons' embattled chief executive, said the grocery sector was undergoing its biggest upheaval since supermarkets emerged in the 1950s, with business moving online and the squeeze on living standards boosting the appeal of low-cost German upstarts Aldi and Lidl.
Retail analyst Nick Bubb said: "The management survival strategy at Morrisons seems to be to keep investors happy with an increased dividend, and the near 6% prospective yield is not unattractive, but the scale of the writeoffs and the profits warning for the current year are still a little breathtaking." "We overlap with the discounters more than anybody else, our customers have felt the austerity programme more than anybody else and these are bold steps to put us back on track.
Philips joined Morrisons four years ago. Asked how long the board would give him to turn the company round, he said he had dealt with gaps in convenience and internet trading and had upgraded the "antiquated" computer systems he inherited. "This is the right plan for this business in this landscape. We can't ignore this structural shift," Philips said.
"I have addressed all three of the first [problems] and now I'm addressing the fourth, which is the discounters," he said. Philips said once Morrisons' prices were close to those of the discounters, customers would be attracted back by Morrisons' bigger range and better products. He admitted that even with the price cuts it would take time for Morrisons to see underlying sales growth again. "I'm obviously not going to forecast when," he said.
Morrisons said it would sell Kiddicare, which Philips bought in 2011 as an attempt to get into online retailing. The £163m writeoff includes the cost of expensive leases on stores opened after the purchase. In an attempt to win over shareholders, Morrisons promised to increase its dividend by 5% this year, and said it would return more capital to investors in future. The 2013 payout rose 10% to 13p.
Morrisons shares regained some early losses but were down 6% at 218.85p. Sainsbury's, which reports results next week, fell 6.3%, with Tesco down 2.9% and Marks & Spencer down 1.5%. Asked how long the board would give him to turn the company round, Philips, who joined Morrisons four years ago, said he had dealt with gaps in convenience and online trading and upgraded the "antiquated" computer systems he inherited. "I've addressed all three of the first [problems] and now I am addressing the discounters," he said.