Business Analysis: Morrisons struggles to make sales as merger takes its toll

Retailers have another poor day as fresh evidence emerges of downbeat Christmas
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The Independent Online

Wm Morrison raised fresh fears yesterday that it was struggling to integrate its massive Safeway acquisition when it revealed that underlying sales had barely risen over the Christmas period.

Wm Morrison raised fresh fears yesterday that it was struggling to integrate its massive Safeway acquisition when it revealed that underlying sales had barely risen over the Christmas period.

The Bradford-based group, which issued its first profit warning last summer, said underlying sales had tumbled across its core Morrisons stores and old Safeway sites. Piling on the misery for investors, the company also admitted the rate of progress at the 56 Safeway stores it has converted to the black and yellow of Morrisons had slowed. Shares in the group fell 12p to 203.5p.

In a new spirit of openness with the City, Morrisons will today break the habit of a lifetime and take investors and analysts on an extensive tour of its properties.

The group said like-for-like sales had slowed sharply across the core Morrisons estate, edging just 0.1 per cent higher, excluding petrol, during the six weeks to 9 January. This was worse than analysts had expected. Last Christmas, there was a 9.6 per cent rise in underlying sales, before the management became distracted with its £3bn purchase of Safeway. If inflation-boosted petrol sales are included, like-for-like sales rose 4 per cent during the festive period.

Bob Stott, the joint managing director, warned underlying group sales were likely to deteriorate further during what is expected to be an even more competitive year for food retailers. He said comparable growth would "probably slow in line with inflation". Excluding petrol, group like-for-like sales have risen 5 per cent during its financial year to date.

Mr Stott said the top line had been cannibalised over Christmas by those newly converted Safeway stores opened near old Morrisons sites. Sales were also hit by intense competition from rivals such as Tesco and Asda, which bought some of the 52 stores Morrisons was forced to divest by the competition watchdog. The group also lost one day's trading because of the extra bank holiday.

Andrew Fowler, at Merrill Lynch, told investors in a research note that there were "lots of statistics so you could clearly cut this Morrison statement a myriad of ways. Sadly, what shines through isn't impressive".

Underlying sales in the Safeway stores yet to be rebranded fell 8.4 per cent during the period, excluding petrol. Although the pace of the decline slowed slightly, Mr Fowler said the unrefitted stores remained "very painful in profit and loss terms".

Morrisons will shortly resume work on converting old Safeway sites; it paused the programme over Christmas to concentrate on trading. It intends to convert four stores a week, up from three a week, and will complete the work by this time next year.

Mr Stott said: "You never get the benefit from conversions until the second Christmas when people have got used to them. You have got to build up trust." He said the group was on track to deliver all the benefits it promised investors by 2007, adding: "We are certainly encouraged that we have reversed the decline in the core Safeway stores and pleased that the Safeway conversion programme has gone according to plan. We're not behind on our plan."

Andrew Kasoulis, at Credit Suisse First Boston, said: "We are encouraged that 'new' Morrisons got through its first Christmas relatively unscathed, although we have concerns that underlying sales at 'old' Morrisons and the conversions are lower than expected."

Comparable sales at the 56 converted Safeway stores rose 4.7 per cent, excluding petrol, during the past six weeks. This was a drop from the 12.5 per cent reported in October, and dragged the store's year-to-date performance into negative territory, a 3.2 per cent fall, excluding petrol.

And shares slipped in Topps Tiles, the tile retailer who said like-for-like sales rose 15 per cent during the first 14 weeks of its financial year, after it warned growth was likely to slow. Whittard of Chelsea, the tea retailer, also disappointed investors, admitting its 3.7 per cent underlying sales growth in the 30 weeks to 26 December was below expectations.

Peacock warns on profits after sales disappoint at bonmarché

Peacock group yesterday painted sharply different pictures of Christmas trading at the two value clothing chains that it owns.

Strong sales growth at its core Peacocks chain was undermined by a dire Christmas for bonmarché, its chain aimed at the over 50s, forcing the group to issue a profits warning.

As Matalan, the out-of-town discount clothing group, revealed underlying sales had recovered last year's festive slump, the high street showed further signs of splitting into value retail winners and mid-market retail losers.

John King, Matalan's chief executive, said: "Value retailers are winning market share from the mid-market, from Bhs as much as Marks & Spencer. It is a trend we expect to continue because the value sector in the UK is still only half the size of that in the US."

Peacock Group, which also owns The Fragrance Shop, joined companies such as Woolworths and Ottakar's, in rushing its trading statement out early because its profits fell £4m short of expectations. Numis Securities cut its forecast by 9 per cent to £39m. Peacock's shares fell 11 per cent to 243p.

Underlying sales at bonmarché tumbled 8.5 per cent during the 13 weeks to 1 January, hit by intense competition at the older women's end of the clothing market. Richard Kirk, the group's chief executive, said M&S's two mega-sales days had compounded aggressive discounting from groups such as Debenhams. He said bonmarché had lost sales to Matalan and the supermarkets but added: "There's no big winner in the 55-plus market."

Peacocks, which is targeted at younger customers, reported a like-for-like sales gain of 9.5 per cent over the 13 weeks to 1 January, helping the group's underlying sales rise 3.4 per cent during the period. Gross margins also moved higher, while total group sales rose 12.5 per cent.

Matalan, which issued a profits warning either side of Christmas in 2003, said like-for-like sales had recovered, climbing 5.3 per cent in the 10 weeks to 8 January.

Susie Mesure

Game's Christmas knocked by PlayStation 2 Suez supply crisis

Game Group, the computer gaming retailer, yesterday blamed a three-day closure of the Suez canal for disappointing results during the normal peak Christmas period.

A closure of the canal in November delayed a tanker delivery of thousands of the best-selling, slimline Sony PlayStation consoles, thereby hitting the retailer's sales, which slumped 20.4 per cent in the eight weeks to 8 January.

Martin Long, the chief executive of Game, said: "The supply problems, which were out of our hands, made it a very difficult Christmas period to satisfy demand for arguably the most-wanted Christmas present in the market. However, I am happy with the performance that we were able to demonstrate in adjusting our strategy to protect revenue as soon as we had visibility of the supply issues facing us."

Despite Sony PlayStation implementing an airlift salvage effort using Antanov cargo planes, the PlayStation shortage was impacting the supply of its rival Microsoft's Xbox by the end of December, with consumers purchasing that console instead.

Shortages of the PS2 consoles had an adverse effect on software sales - which have higher profit margins - despite new product offerings such as 'Grand Theft Auto: San Andreas' and 'Halo 2'.

During the festive period, Game opted to sell the in-demand consoles with software packages, enabling it to retain reasonable margins. "Game was able to increase margin from 20 per cent on hardware to about 25 to 28 per cent on a bundle including software," Rhys Williams, at Seymour Pierce, said.

Analysts reacted to Game's results by cutting profit forecasts by nearly £2m from about £32.5m before goodwill and exceptional charges.

But Game's shares rose from 62p to 66.5p as some analysts, such as Baird's Paul Smiddy, concluded that the group successfully got through the difficult trading period. Mr Smiddy was heartened by Game's forecast that it will be close to break-even by the end of the year.

Robert Garrett

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