Competitive pressures continue to challenge no-moat WM Morrison (MRW), but the firm’s like-for-like sales declines moderated during the third quarter, and Morrisons’ shares, as well as those of other U.K. grocers Tesco and Sainsbury, jumped following these results in response to investors optimism that a bottom may have been reached.
We still expect Morrisons’ sales to decline over the near term, and we don’t expect to make a material change to our £2 fair value estimate. Shares remain undervalued, but we don’t think one quarter of smaller LFL sales declines is enough to have conviction on a turnaround. As such, we recommend that investors wait to purchase the shares at a greater margin of safety.
LFL sales declines (down 6.3% excluding fuel) show that Morrisons still faces an uphill battle to stop market share losses, as the shortfall was due to 3.3% lower traffic, 2.4% fewer items per basket, and lower prices. That said, results are improving, as third-quarter declines compare with previous LFL sales declines of 5.7%, 7.1%, and 7.6% in the fourth quarter (of last year), first quarter, and second quarter, respectively. The company is working actively to reduce the number of stock-keeping units it carries (down about 10%--to 22,150 SKUs--since the fourth quarter of last year) as well as the number of items on promotion (down about 13.6%).
We remain cautious on the U.K. grocery space, but we do see some reason to believe that competitive intensity has reached its peak. Most of the big four grocers - Tesco (TSCO), Sainsbury (SBRY), Asda, and Morrisons -have reduced their promotional activities and cut prices (at the expense of margins) to be more competitive with the discounters Aldi and Lidl.
Moreover, Morrisons is now price-matching the discounters and the other large grocers. If fewer (and more effective) promotions and price matching are well-articulated to consumers and Morrisons continues to build out its omni-channel capabilities, we think LFL sales trends should stabilise.