UPDATE 2-Morrisons sales slide as price cuts, weak market take toll

Thu May 8, 2014 5:35am EDT

* Q1 like-for-like sales down 7.1 pct vs f'cst down 5.9 pct

* Easter disappointing, company says

* Seeing "very strong uplifts" in volume where prices cut

* Maintains year's profit forecast after March warning

* Shares up 0.9 pct (Adds detail, CEO, analyst comment, shares)

By James Davey

LONDON, May 8 (Reuters) - Britain's No. 4 grocer, Morrisons, said a decline in underlying sales accelerated in its first fiscal quarter, hurt by price cuts intended to combat a loss of trade to discounters as well as a weak overall food market.

Morrisons, based in Bradford in northern England, trails market leader Tesco, Wal-Mart's Asda and J Sainsbury by annual revenue. It has more than 500 stores, but it lacks exposure to fast-growing online and convenience-store markets.

It also has to cope with a UK grocery market growing at its slowest rate for 11 years as stagnant wages keep consumer spending in check.

Morrisons said sales at locations open more than a year, excluding fuel and VAT sales tax, fell 7.1 percent in the 13 weeks to May 4, its fiscal first quarter.

That was worse than analysts' average forecast for a decline of 5.9 percent, a fall of 5.6 percent in the key Christmas period and a 2.8 percent decline in the full 2013-14 year.

"We were disappointed. It wasn't a strong Easter for us," Chief Executive Dalton Philips told reporters. "Those customers that had traditionally traded out of the discounters into Morrisons weren't doing it at Christmas and they didn't do it at Easter, either."

Shares in Morrisons fell up to 3.4 percent in early trading but were up 0.9 percent at 0900 GMT on Thursday. They have lost over a quarter of their value so far this year and trade at near eight-year lows.

Morrisons has warned that like-for-like sales are unlikely to improve anytime soon as lower prices reduce actual sales going through the till.

"With such weak trading, we cannot yet call whether or not we have come to the end of the downgrade cycle for Morrisons," said Shore Capital analyst Darren Shirley.

British consumers are shopping around to save money and are wasting less, shying away from big weekly shops and buying little and often in local convenience stores or online.

"The macro factors that impact the whole food market had as big an impact in the quarter as did our price investment," said Finance Director Trevor Strain. "As we make more investment, that deflationary impact will build as we go through the year."

Morrisons, like its three biggest rivals, has been losing market share to German discounters Aldi and Lidl .

In March, Morrisons said profits would more than halve this year as it set out a plan to restore its low-price image and boost sales volumes. That plan called for spending 1 billion pounds ($1.7 billion) to cut prices over the next three years, a move that sparked fears of an industry price war.

A first round of price cuts in March on basics like milk, broccoli and chicken was followed by a second phase last week that saw prices on 1,200 products reduced by an average of 17 percent.

"It's very early days, but as we continue to improve our competitiveness, our points of difference will shine," Philips said, pointing to Morrisons' in-store services, product range and unique position among UK grocers as a major food manufacturer.

He said products featured in the second phase of price cuts, which was backed by a major marketing campaign, had already seen "very strong uplifts" in sales volumes.

Morrisons said on Thursday its forecast of underlying profit before tax in the range of 325 million-375 million pounds for 2014-15 remained unchanged.

The company said it was making good progress with all its strategic initiatives. It was on schedule to meet its target of opening up to 200 convenience stores by the end of the year, and Morrisons.com, a joint venture with online grocer Ocado that opened in January, was performing ahead of expectations.

Philips said the company will begin offering a Morrisons loyalty card in the fourth quarter. ($1 = 0.5894 British Pounds) (Editing by Brenda Goh and Paul Sandle, Larry King)

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