WM Morrison Supermarkets (LSE: MRW) is a UK blue-chip which, like Taylor Wimpey, is set to update the market in the coming days. It’s scheduled to unpack Christmas trading numbers on January 7, but unlike the housebuilder, I’m fearful over what the FTSE 100 firm will have to say for itself given the depressed state of consumer spending and the increasing fragmentation of the grocery sector.
The supermarket didn’t exactly fill me with confidence last time it updated the market in September. I wasn’t expecting fireworks given the strong results of a year earlier, numbers that had been boosted by good weather and the support of the FIFA World Cup. But a 1.9% drop in like-for-like sales in the most recent April-June period gave investors plenty to think about as industry figures suggest a tougher time for Britain’s ‘Big Four’ supermarkets.
Bad data!
The latest Kantar Worldpanel report in the interim has certainly made for grim reading for Morrisons and its traditional rivals like Tesco, Sainsbury’s and Asda. Indeed, the Bradford firm has been the worst-performing of all these established chains of late, sales dropping 2.9% year on year in the 12 weeks to December 1.
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Sales across the broader grocery category continue to slow and for the last three-month period, growth clocked in at a meagre 0.5%, Kantar says. The researcher said that “we’re yet to see consumers ramp up their spending in the run-up to Christmas and, as anticipated, Black Friday only brought a limited boost for the grocers.” However, the impact of this month’s general election and wet weather has done little to dent the march of the discounters, firms that have ripped up the market domination of Morrisons and its peers.
According to Kantar, sales at Aldi and Lidl boomed 6.2% and 9.3% in the period ending December 1, crowning what has been another brilliant year for the disruptors. Their growing influence means that the aggregated market share of the Big Four dropped to 67.7% at the start of the month versus 69.1% at the same point in 2018.
Big risks
In the trading release I mentioned at the top of the piece, Morrisons chief executive David Potts struck a rather bullish tone, despite that big revenue fall in Q2. He said that “we are planning both for retail [like-for-like revenues] to improve” in the second half of the fiscal year and for “additional cost saving opportunities” too.
But should the very real threat of more sales weakness be revealed in next week’s release, then the retailer’s share price — which fell around 5% in 2019 — could come under fresh stress. Right now, Morrisons trades on a forward P/E ratio of 14.4 times, in line with the broader FTSE 100 average. But given the high chance of earnings forecasts missing their mark, I reckon the supermarket should be much, much cheaper. In my opinion it’s a share best avoided like the plague.
