Christmas Trading Update

On Tuesday, Morrisons, the fourth-largest grocery retailer in the UK, was the first of the major food retailers to report Christmas trading. Sainsbury’s updates the market on Wednesday and Tesco on Thursday. Morrisons posted comparable sales growth of 2.8% in the 10 weeks ended January 7. Analysts had estimated 1.7% comp growth for 4Q18, which closes at the end of January, according to S&P Capital IQ. Morrisons’ comp figure includes wholesaling to Amazon and convenience stores. The company’s own retail comp came in at 2.1%. This was a strong performance, accelerating from the prior quarter and lapping a strong Christmas in the previous year. In the prior period, 3Q18 ended October 29, comparable sales (including wholesale) were up 2.5%. Last Christmas, Morrisons reported comp growth (including wholesale) of 3.3%. Management noted that this year’s Christmas trading was particularly strong over the core holiday period, with comparable sales (including wholesale) rising 3.7% in the six weeks ended January 7. Management attributed the outperformance to strong sales of its premium own-brand ranges, 50% growth in food to order and a wider range of “Free From and “Morrisons Makes It” ranges. The company grew online grocery sales by more than 10%. Comparable transaction numbers rose by 2.3% in the 10-week period, but the number of items per basket fell 4.4%, continuing trends observed in previous quarters.

Outlook

The company’s full-year expectations remain unchanged. At Morrisons’ half-year results, management had noted the following expectations:

• Net debt is expected to remain below £1 billion for the rest of FY18. In 1H18, Morrisons reduced its net debt by £262 million, to £932 million, which is below its year-end £1 billion target.
• Total annualized wholesale revenues are expected to exceed £700 million by the end of FY18, and wholesale is expected to generate £1 billion in sales “in due course.”
• Total medium-term incremental profits from wholesale, services, interest and e-commerce are now expected to be £75–£125 million, versus previous expectations of £50–£100 million.

For FY18, which closes at the end of January 2018, analysts expect Morrisons to increase revenue by 4.5% to £17.05 billion, and to grow EBIT by 3.0% and pretax profit by 19.3%. The consensus estimate is for GAAP EPS of 12.62 pence in FY18, versus 12.95 pence in the prior year. These estimates were collated before the latest results announcement.