Morrisons: does pandemic profit hit hide bigger problems?

There are a couple of ways to look at the full-year results from Wm Morrison this morning.

The first angle is how it has dealt with the pandemic and what that’s done to the balance sheet. And the second is to give it all a bit of context by looking at how Morrisons has been getting on generally - it might not be fair to look at 2020 in isolation.

First things first.

Sales up, profits down

The company’s like-for-like sales (stripping out new stores and closures) were up by 8.6% in the year to the end of January, against a fall of 0.8% this time last year. Revenue came in a whisker higher at £17.6bn versus £17.5bn in 2020.

This is the side of things investors were eyeing up this time last year as panic-buying started to take hold. But it looks like they may have got ahead of themselves. The cost of servicing the loo-roll hoarders has been eye-watering.

Profits before tax and exceptional items dropped by 50.7% to £201m. The big hit here was the £290m spent to cover staff sickness, bring in new employees and keep staff and customers safe.

This morning’s results show the figure could have actually grown by 5.6% to £431m if the company hadn’t waived £230m worth of government business rates relief.

Profit before tax, the bottom line number, fell 62.1% to £165m from £435m the previous year once other costs, including those connected to restructuring, were added in.

2021 COVID-19 direct costs

Morrisons won’t be the last company to take a deep breath and rip off the 2020 plaster this year. Helping them is the fact that shareholders were probably already bracing themselves for the hit.

The bigger picture

It would be a mistake to gloss over company results in 2021, with throwaway comments on the pandemic hitting profits. Now, there’s no escaping that will be a big hurdle for companies reporting this year but there’s always a chance to glean more from a firm’s ability to cope with stress. Arguably, there’s never been a better chance to get an idea of that than this year.

One standout part of today’s announcement is the company’s admission that return on capital employed (ROCE) fell to 3.9% from 7.0% last year, due to lower profit before exceptionals.

That’s a key measure for growth because it looks at how good the company is at reinvesting its profits and making even more profit on top of that.

For reference, professional investors aiming for steady growth often try to look for firms with a ROCE of at least 15%, if not higher.

Morrisons has been hovering around the 5-6% range for the past five years. That puts the company’s keenness to reassure the market it will get back to profitability into perspective. Even if it does shoot back up into big profits, is it really using that money efficiently?

Part of that use of cash will be how it maintains its income consistency. Investors will have liked January’s special dividend and today’s signs of getting back to normal.

But shareholders don’t just invest to have their money given back to them. There has to be the prospect of growth and that will need to come soon. That goes for market share too.

Morrisons has currently got around 10% of the UK pie and is fending off challenger Aldi, which has 7.7%. Tesco has reduced the German discounter’s market share through its ‘Aldi Price Match’ but if the plucky upstart is going to pick off any of the top four it’s most likely to be Morrisons.

What’s in store for Morrison’s in 2021?

Looking ahead, there’s a lot for investors to mull over, not least the closer tie-ups with Amazon.

The ‘Morrisons on Amazon’ proposition offers Amazon Prime members same-day delivery on Morrison’s products online. According to Morrison’s, it is “now available in c.50 towns and cities, and already accounts for more than 10% of sales in the majority of our stores where we offer the service.”

That could be a decent source of growth, given the supermarket’s online sales tripled during the year. Morrisons is also supplying the new Amazon Fresh grocery store which opened last week.

Keeping these avenues open will be important for those used to shopping from home by now and not ready to head back to a packed superstore.

And the firm is backing itself to get back into growth mode. It expects next year’s profit before tax and exceptionals, including rates paid, to be higher than the £431m reported today (excluding the £230m waived rates relief).

That means these tie-ups need to work and whatever profits are made need to be recycled efficiently, something we haven’t seen across the whole supermarket sector for a long time.

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