Updates from Morrisons and John Lewis highlight the mixed signals emanating from the retail sector as Brexit approaches.
Middle England stalwart John Lewis, which owns the eponymous department store and Waitrose supermarkets, has just reported a £25.9 million loss for the first-half of the year, blaming subdued consumer confidence because of Brexit uncertainty. Weak demand for home products and electrical sales hit overall profits, the company said. This could suggest that shoppers are putting off non-essential purchases as the October 31 deadline for leaving the EU comes closer.
The partnership's chairman, Charlie Mayfield, said: "Should the UK leave the EU without a deal, we expect the effect to be significant and it will not be possible to mitigate that impact.”
FTSE 100 supermarket Morrisons, meanwhile, is proving more resilient, with profits up more than 5% to just under £198 million. A 0.2% increase in like-for-like sales in the six months to August 4 hardly suggests that business is booming. Still, with recession fears growing, supermarket stocks can start to show their defensive qualities. The company’s shares were up 3% on the update to just above 200p, having started the year at 211p. Investors were also cheered by a rise in the dividend above inflation and a special dividend.
Morrisons' Amazon Deal Extended
Of course, Amazon is one of the biggest threats to UK retail so Morrisons investors were buoyed by news that its tie-up with the US retail giant is being extended. Previously Morrisons had a “rolling” partnership with Amazon, which allows Morrisons customers to do a full shop online and have the delivery fulfilled by Amazon. That’s now been extended to a multi-year contract. Morrisons customers in four UK cities can have their groceries delivered within one-hour ordering; this is also being rolled out to more locations, the retailer announced with the results.
One area of comparison between John Lewis Partnership and Morrisons is in grocery sales, although the demographic their serve is different. While department stores let John Lewis down, Waitrose sales were more robust – online grocery sales were up 11% in the six months.
Arlene Ewing, investment manager at Brewin Dolphin, says Morrisons’ 4.9% sales growth in the last financial year will be hard to beat. However, she says that the “recent expansion of its partnership with Amazon shows a clear focus on becoming a major player in online groceries”. One of Morrisons’ biggest rivals in the online grocery sector is Ocado (OCDO), which reports next week. Ocado’s share price has significantly outperformed the FTSE 100 this year, rising from 810p at the start of the year to £13.64, a climb of 68%. The FTSE 100 is up 9% year to date.
The UK high street’s problems are well documented, but Next’s update at the end of July bucked the trend with a 3.8% rise in sales in the six months to the end of July. Some retail analysts believe that Next is more resilient than most because its Next Directory allowed it to fight off competition from online rivals such as Asos, which issued a profits warning earlier in the summer.
While John Lewis is privately owned, Morrisons (MRW) is held by a number of active and passive funds, particularly those focused on income – its current yield is around 3.5%. Morningstar analyst Ioannis Pontikis believes its shares are fairly valued after this most recent update.
Pontikis believes that Morrisons has a tighter control on costs than Tesco and Sainsbury’s, with a stronger balance sheet and no pension deficit. But it lags behind its rivals on market share. Pontikis is looking for an improvement in retail sales volumes in the coming quarters, although he warns it remains a "hypercompetitive market".
Morrisons is owned by Silver-rated Schroder Recovery fund. Its manager, Kevin Murphy, spoke at the Morningstar Investment Conference this year about the challenges of value investing and the importance of socially responsible companies.
