Morrisons to cut prices after second profit warning in three months

Sean Farrell
13 March 2014
theguardian.com
Morrisons has issued its second profit warning in three months as it announced a programme of aggressive price cuts to take on Aldi and Lidl.
The group is also selling £1bn worth of property to pay off debt and fund its dividend. Alongside the disposals, Morrisons announced that it is revamping its stores and cutting prices over the next three years in a £1bn programme, starting with £300m of investment this year.
However, the announcement of the fightback strategy was overshadowed by a profit warning, the second since Morrisons revealed poor festive trading in January. Morrisons shares tumbled more than 10% in early trading, dragging Tesco, Sainsbury’s and Marks & Spencer down sharply as well.
Morrisons posted an underlying pretax profit for 2013 of £785m – down 13% but in line with analysts’ depressed expectations. Revenue fell 2% to £17.7bn and sales at stores open a year or more excluding fuel and VAT fell 2.8%.
Announcing the profit warning, the company said trading conditions would stay tough and that equivalent underlying profits for the current year would drop to between £460m and £510m. Analysts had expected a profit of about £732m for this year.
Dalton Philips, Morrisons’ embattled chief executive, said the grocery sector was undergoing its biggest upheaval since supermarkets emerged in the 1950s, with business moving online and the market disturbed by squeezed living standards and the success of low-cost German upstarts Aldi and Lidl.
“We overlap with the discounters more than anybody else, our customers have felt the austerity programme more than anybody else and these are bold steps to put us back on track. This is the right plan for this business in this landscape. We can’t ignore this structural shift.”
In a bid to win over shareholders, Morrisons promised to increase its dividend by 5% this year and said it would return more capital to investors in future. The 2013 payout rose 10% to 13p.
The group is selling £1bn of its £9bn property portfolio to boost cashflow for the next three years. It said investment would be funded by reduced capital investment and efficiency savings.
Retail analyst Nick Bubb said: “The management survival strategy at Morrisons seems to be to keep investors happy with an increased dividend, and the near 6% prospective yield is not unattractive, but the scale of the writeoffs and the profits warning for the current year are still a little breathtaking.”
Philips joined Morrisons four years ago. Asked how long the board would give him to turn the company round, he said he had dealt with gaps in convenience and internet trading and had upgraded the “antiquated” computer systems he inherited.
“I have addressed all three of the first [problems] and now I’m addressing the fourth, which is the discounters,” he said. Philips said once Morrisons’ prices were close to those of the discounters, customers would be attracted back by Morrisons’ bigger range and better products.
Morrisons said it would sell Kiddicare, which Philips bought in 2011 as an attempt to get into online retailing. The £163m writeoff includes the cost of expensive leases on stores opened after the purchase.
Morrisons shares regained some early losses but were down 6% at 218.85p. Sainsbury’s, which reports results next week, fell 6.3%, with Tesco down 2.9% and Marks & Spencer down 1.5%.