Morrisons raises profit forecast as sales boom

Supermarket shows it can lift margins as well as sales

The UK's fourth-biggest grocer, Morrisons, lifted its full-year profit expectations yesterday in an unscheduled update, as its powerful sales momentum feeds through to the bottom line.

The Bradford-based grocer's second-quarter underlying sales, excluding fuel and VAT, are thought to be in line with the 8.2 per cent growth posted for the previous 13 weeks to 3 May, although Morrisons declined to provide a figure. More impressively, the buoyant second-quarter growth was up against one of the grocer's strongest-ever quarters last year.

The update caused City analysts to upgrade their underlying full-year pre-tax profits, from a consensus of £664m to £740m. The upgrade was significant because some City analysts had previously expressed disappointment that Morrisons' juggernaut sales growth over the past two years had not boosted its gross margins more substantially.

Darren Shirley, an analyst at Shore Capital, said: "To our minds, the strong margin progress, which has resulted in material upgrades to forecasts, blows a hole in any concerns around the market that the strong outperformance of the past 18-24 months has been driven by the group 'buying sales'."

Shares in Morrisons jumped by 20.75p, or 8 per cent, to 274p.

The engine room of Morrisons' second-quarter sales was the more than 500,000 additional customers the grocer is attracting through its doors each week. In a statement, Morrisons said: "An increasing number of customers are shopping with Morrisons attracted by the group's fresh offering, keen positioning on price and promotions and its industry leading service and availability."

Along with better-than-expected operating efficiencies from its technology and distribution-centric optimisation programme, Morrisons said it expects the resultant volume growth to lead to a 40 basis points uplift in its gross margin, excluding fuel, for the full year.

Of the City's profit upgrade, about £50m is expected to come from improved gross margins and £20m from additional savings from its optimisation programme, including improvements in its distribution network and self checkout.

Across the country, Morrisons continues to deliver its strongest growth in the South and Scotland, outside its traditional heartland of the North of England. The grocer is thought to vary its product offer by up to 15 per cent, or 2,000 lines, in different parts of the country, catering for the diverse tastes of customers of varying age, wealth or ethnicity, for example.

While Morrisons is delivering growth across its range, sales of its value lines and fresh food – from its Market Street concept of individual outlets, including butchers, fishmongers and bakers in stores – were the star performers.

As part of its long-term expansion plans, Morrisons has this year acquired more than 30 stores from the Co-operative Group, which completed the acquisition of Somerfield in March. It is understood the grocer has already converted 14 of the Co-op's stores to Morrisons and is converting up to five a week.

Grocery market: Morrisons shows rivals clean pair of heels

Further confirmation of Morrisons' momentum came yesterday from TNS Worldpanel, which said the grocer's sales grew by 9.5 per cent for the 12 weeks to 12 July. Its growth outstripped Asda's 8.1 per cent, Sainsbury's 7.7 per cent and Tesco's 5.7 per cent over the period. The market research firm TNS Worldpanel said this was Morrisons' 22nd successive period of market share growth and lifted its overall market share to 11.6 per cent. Meanwhile, Waitrose again impressed with sales up by 8.2 per cent over the 12-week period. Its discount range, Essential Waitrose, has boosted the grocer's sales. TNS's previous comments that food shoppers are reverting back to "pre-recession behaviour" is again borne out by the discounters Aldi and Lidl delivering more subdued sales compared with last year, up by 8.3 per cent and 6.8 per cent respectively over the period.