Morrisons finishes 2020 ahead, but the pandemic has left a mark

Supermarket faces stiff competition, though investors recognise its prospects.

Morrisons (LSE:MRW) may never again face such a year of change, challenge and cost, and to have finished the year ahead is some achievement.

The pandemic has not been the green light for supermarket profits as some originally imagined, with the extra costs of staffing, store-safe preparation and extra distribution totalling £290 million.

In addition, the company decided to repay business rates relief of £230 million, which has skewed the overall profit number.

Despite those costly and probably exceptional expenses, Morrisons remains in good shape. Net debt may have temporarily spiked, due in no small part to the pressure on cashflow from lower fuel sales (down 43% during the third lockdown), but the company is underpinned by a largely freehold portfolio, access to further credit if required and a cash-generative business.

This in turn has enabled the dividend to be increased, implying a yield of 4%.

While the special dividend will not be repeated this year (the one paid in January related to the previous trading year), the yield is nonetheless attractive for income-seekers and represents management confidence in prospects.

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Coming from a lower base than most of its rivals, the online operation is expanding strongly, with a fivefold increase in capacity leading to a tripling of online sales. The pandemic has brought forward plans the company had to give more focus to this channel, and it is clearly on the right track.

In addition, the recent announcement of an extension to the McColl’s tie-up and an evolving relationship with Amazon will provide further opportunities for growth as the Morrisons brand becomes more established.

There are pockets of optimism in the performance and indeed the outlook, particularly when considering the exceptional backdrop. Like-for-like sales grew by 8.6% in the period, above expectations, with the fourth quarter figure up 9%.

Revenues also nudged ahead, to £17.6 billion, and the overall pre-tax profit number of £165 million inevitably carries the burden of the repayments as well as Covid-19 related costs.

The share price has fluctuated significantly over the last year, in a range between a low of 163p and a high of 200p. Unfortunately, the more recent weakness in the price has resulted in the company’s relegation from the FTSE 100, even though the performance over the last year shows a marginal gain of 0.3%, as compared to a rise of 14% for the wider FTSE.

Despite its best efforts, Morrisons is in a fiercely competitive sector where investors see better value elsewhere. The market consensus of the shares as a strong ‘hold’ does, however, offer some recognition of future prospects.