Morrisons AGM statement

5:17 a.m. Fri 27 May 2005

At the AGM, Morrisons updated the market on the sales numbers for the 15 weeks ended 15 May 2005.

Total group LFL sales improved over what was reported during the first six weeks of the year. Total group LFL sales were up 2.3% excluding fuel. However, worryingly core Morrions sales have not recovered. LFL sales at core Morrisons have deteriorated with LFL sales down 2.3% (excluding fuel) a larger fall than the 1.2% LFL sales fall seen during the first six weeks. Morrisons attributes the fall to tougher competition from divested stores and cannibalisation from Safeway conversions. Even stores unaffected by these two factors increases sales by only 1.5%; a lower growth compared with the 8.5% increase in the previous year.

Those former Safeway stores now trading under the Morrisons format continues to perform well. The sales decline on stores yet to be converted has reversed, and for the first 15 weeks, encouragingly reported a 3% sales increase with customer numbers up by 8.2%; the strategy (which is common to all supermarkets) of cutting prices appears to have worked with customer numbers up 8.2%

Morrisons plans to complete the conversion of Safeway stores to the Morrisons format by November 2005. The average cost of conversion is running at £1.5m per store and Morrisons will classify two-thirds will as an exceptional cost; which may mean things have not gone according to plan or that Morrisons have payed a full price for Safeway. As commented in the previous trading statement the running of a dual distribution system and additional duplicate administration costs will increase costs; another indication that things are not going as planned.

The management information system within Morrisons is still not functioning properly. Morrisons appears to not have pro-actively managed the risk of integrating both systems. As a result, Morrisons are unable to provide a "reliable guidance" of the expected profit level for the year. Operating margins will be lower (due to additional costs of maintaining duplicate activities), but Morrisons did not quantify the effects, again a result of being unable to have reliable forecasts. To rectify the said problems, Morrisons will now use the services of KPMG and hopes to rectify the system by October when the company announces its half year results.

Morrisons appears positive on future prospects. Justifiably, the end of the conversion programme will reduce costs. The increase in sales from the converted stores, and those to be converted are encouraging. However, the performance of the core stores are a concern, with sales lost to competitors being the major concern; but we do not know how much is lost to competitors and how much is lost to the converted stores.

Morrisons' share trades at a prospective PE of 13.3× (187.75p) 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, and further difficulties), which may indicate poor planning or 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 enlarged Morrisons maintain (or grow) its market share.