13th Mar 2014 13:06
LONDON (Alliance News) - Wm Morrison Supermarket PLC warned Thursday that underlying profits this year could halve, slashing its margins, as it takes on bigger rivals in announcing big cost-cutting measures and price cuts in an attempt to fend off hard discounters and boost its dwindling market share.
The UK supermarket sector is in the middle of a pricing war, as the UK's biggest supermarket chains continue to announce huge price cuts to fend off heavy discount rivals like Aldi and Lidl.
It is a war that only the bigger supermarkets like Tesco PLC and J Sainsbury PLC, with deeper pockets will win, leaving Morrisons, the UK's fourth largest grocer, in trouble to maintain its market share in the sector.
The supermarket chain reported a 13% decline in underlying profits in the financial year ended February 2, and swung to a pretax loss of GBP176 million for the year on big exceptional charges, compared with a pretax profit of GBP879 million the prior year.
"We held our own against the big three supermarkets, but lost share against big discounters," Chief Executive Dalton Philips told journalists in a call Thursday.
Morrisons on Thursday announced a major development in its strategy, which follows similar moves by peers Tesco and Sainsbury, to spend big on cost-cutting measures and price reductions.
Morrisons also announced some GBP1 billion in property disposals, including its Kiddicare business and its stake in US online grocer Fresh Direct, set to result in GBP600 million in working capital savings over the next three years, and said it will invest GBP300 million this year in customer propositions, including price cuts, although Philips did not specify how much of that would be invested directly on price reductions.
"We will have lower prices on a permanent basis, offer fewer more impacting promotions, and will offer a Morrison card to our customers," said Philips.
Last month, Tesco announced it would be investing GBP200million to drive down prices on everyday items, and said capital expenditure will be reduced to no more than GBP2.5 billion per year for at least the next three financial years, which it said it will focus on online and convenience growth, and on an accelerated refresh programme for its larger stores.
Ahead of the Tesco announcement last month, British supermarket chain Asda, which is owned by US retail giant Wal-Mart Stores Inc., said it would add GBP100 million to its planned GBP200 million in price cuts this year.
Morrisons also followed its peers by announcing big cuts in capital expenditure, to GBP550 million in the current year, and GBP400 million thereafter.
"We will strengthen our business by GBP1 billion over three years from operating improvements, reducing sourcing costs, working capital and reduced capital expenditure," Philips added.
Management reiterated that it is committed to its progressive dividend policy, having raised its total dividend for the recent year by 10%, and committed itself to a minimum 5% dividend per share increase this year.
Morrisons announced plans for a total of GBP1billion in property disposals over the next three years, of which between GBP400 million and GBP500 million in property disposals will be realised this year.
Morrison's property portfolio has an estimated market value of around GBP9 billion, of which over 90% of its core estate is freehold, and Philips told journalists in a call, that the group's freehold ownership will not fall below 80%.
Management rebuffed comments that the property disposals are to help invest in its stores and businesses.
As part of the disposals, it is selling all non-core assets including its baby products retailer Kiddicare, after a disappointing trading performance during the year, and its stake in the US online retailer Fresh Direct.
"The market has structurally changed. Our focus has to be on our core business with food, and Kiddicare doesn't fit. We are reducing our cost base, and cannot run both," Philips told journalists Thursday, adding that "in our opinion, large stores are not sustainable."
Morrisons reported an underlying pretax profit of GBP785 million for the financial year ended February 2, a 13% drop when compared with GBP901 million a year earlier.
Revenues for the year were down 2% to GBP17.7 billion, from GBP18.1 billion the prior year, and the chain reported a steeper decline in like-for-like sales excluding fuel and VAT, of 2.8%, compared with 2.1% a year earlier.
Morrisons warned that, as the challenging consumer and market environment continues, for the current financial year it is expecting to earn little better than half of what it recorded in the financial year just ended.
"At this early stage in the year, we anticipate that underlying profits in 2014/15 will be in the range of GBP325 million to GBP375 million, after charging GBP65 million of new business development costs and GBP70 million of one-off, non-recurring costs," the company said in a statement.
Including all those charges, Morrisons said it is expecting an underlying profit of between GBP460 million and GBP510 million for the current financial year, in comparison to the GBP785 million in underlying profits for the year ended February 2.
During the year, the supermarket booked a total of GBP903 million in exceptional costs, including a GBP163 million writedown on its Kiddicare business, a GBP319 million impairment of sites it no longer wants to build on, and GBP379 million in respect to trading stores.
"We have addressed structural weakness with our business, and in particular online," said Philips.
Morrisons finally launched its online food business at the end of December, with the help of online delivery company Ocado Group PLC which is delivering Morrisons' goods from Ocado?s recently opened Dordon customer fulfilment centre in the Midlands. It commenced deliveries across the Midlands on January 10, and Morrisons reaffirmed that it expects to have the capacity to reach half of UK households by the end of the current financial year.
"The online business has only been running eight week, but it is going well so far. We are looking to add more vans already as we are full to capacity," said Philips.
"We spent GBP200 million last year on the Daldon facility. We will exit this current year at a run rate of GBP200 million, but as we go into 2016, we will have to look capex going past that," Philips told journalists Thursday.
As well as developing its fledgling online business, Morrisons has also been focusing investment on the roll-out of convenience stores, another area other grocer rivals are reporting strong growth in.
Morrisons said it has made progress developing its convenience store network, with now over 100 Morrison locals. Supermarket rival Sainsbury's opened 19 convenience stores in the third quarter alone.
Morrisons was the biggest faller on the FTSE 100 Thursday, trading down 9.8% at 210.10 pence, followed closely by peers J Sainsbury and Tesco, down 7.3% and 4.6%, respectively.
By Rowena Harris-Doughty; [email protected]; @rharrisdoughty
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