Investors can sometimes appear an ungrateful bunch. Once in danger of being dumped out of the FTSE 100, a resurgent Morrisons this week announced an above-expectations jump in sales and profits, a drastic cut to net debt and a special dividend to reward shareholders. The City’s response? To send Morrisons down 4.9% to 215.3p on Wednesday to hit its lowest level so far in 2018.
So what happened? The top-line results were undeniably positive. The supermarket reported a solid 2.8% of like-for-like growth in both the fourth quarter and full-year period (up from 1.9% last year), while pre-tax profits jumped 17% to £380m. It also reduced its levels of net debt by a considerable £221m down to £973m, falling below its £1bn target, and managed a net pension surplus of £574m.
Broker Jefferies welcomed the results, noting: “Morrisons’ full-year results slightly beat consensus and the release points to considerable self-help still available to drive future earnings gains.” House broker Shore Capital said the 4p per share special dividend “shows just how far the business has positively travelled.”
What weighed on the share price was where this profit boost was coming from. While the headline figures showed healthy growth, the improvement was largely driven by a lessening of interest payments relating to its net debt. On a gross margin level, the news was not so positive. SocGen calculated its full-year underlying EBIT of £445m implied a 10bp margin contraction in the second half after a 4bp erosion in the first half. The broker said: “This can be seen as a resilient performance given the challenging trading environment but is nevertheless a break from the strong +54bp margin recovery seen in 2016/17.”
City Index also raised worries over cashflow, pointing out that free cashflow generation almost halved during the year to £350m and only £132m of that related to retail sales, with the balance coming from disposals and improved working capital.