Morrison trading statement

5:59 a.m. Mon 16 May 2005

The integration of the Safeway is not proceeding smoothly at Morrisons. Morrison said that duplicate costs (costs of distribution, administration etc at Safeway) are higher and will take longer than current market expectations. Morrison will run these duplicate activities until it completes its conversion of Safeway stores to the Morrisons format.

Morrison expects to complete conversion by November 2005. It is no surprise that the operating margins will be lower, but this is a result of higher costs at former Safeway stores. Gross margins are also low (Safeway 22.9% ,core Morrisons 26.1%) and as the conversion progresses, margins should come in line with the core stores.

The trading statement also said that total aggregate sales were good, but did not go into detail. In the full year preliminary results announcement (23rd March 2005) Morrison said that LFL sales during the first six weeks of the first half at core Morrison were down 1.2%. Morrisons will give more details at the AGM, which will be held on the 26th of May.

Morrisons' share trades at a prospective PE of 13.3× at the lower end of the range for the sector. The 2.6% yield is in line with the sector. The integration appears to not have gone as planed (with Morrisons issuing a number of profit warnings), which may indicate poor planning and the complexities of a large acquisition. The successful integration of Safeway will obviously enhance profits (more than double the profits) which will put the share at a single digit PE provided that Morrisons maintain (or grow) its market share.