Morrison Shares Plunge as Company Forecasts Profit Decline

Photographer: Chris Ratcliffe/Bloomberg

A pedestrian uses a mobile handset as she stands with a baby stroller outside a Morrisons M Local store, operated by Wm Morrison Supermarkets Plc, in London. Close

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Photographer: Chris Ratcliffe/Bloomberg

A pedestrian uses a mobile handset as she stands with a baby stroller outside a Morrisons M Local store, operated by Wm Morrison Supermarkets Plc, in London.

Wm Morrison Supermarkets Plc (MRW) shares plunged the most in 11 years after the U.K. grocer said profit will decline this year as it cuts prices and improves supermarkets to fend off the increasing pull from discounters.

Underlying pretax profit will be 325 million pounds ($542 million) to 375 million pounds in the current fiscal year, the Bradford, England-based company said in a statement today. Profit in the last fiscal year fell to 785 million pounds, the company said today, the second straight decline. The shares dropped 12 percent.

As sales and profit slide, Morrison has been under pressure from shareholders to get a better return from its 9 billion-pound property portfolio. The grocer today pledged to sell off 1 billion pounds of real estate, while keeping 80 percent under its direct control. To improve sales at stores, the company will invest 1 billion pounds in cutting prices to lure back shoppers lost to discounters such as Aldi and Lidl.

“The negative is that it means profit is loosely half what the market was expecting and there’s no obvious message on how they recover from that,” said Andrew Gwynn, an analyst at Exane BNP Paribas in London. “The positive is that they’re really prepared to try and invest to fix the problems.”

Morrison shares dropped 27.8 pence to 205.2 pence in London, the biggest decline since January 2003. Rival J Sainsbury Plc (SBRY) fell 8.5 percent and Tesco Plc declined 5 percent. Morrison will pay a total dividend of 13 pence a share, up 10 percent.

After one-time costs of 903 million pounds, the company posted a pretax loss of 176 million pounds.

Property Sales

Morrison will sell the real estate over the next three years, and expects to raise as much as 500 million pounds this year. The property is the subject of interest from private-equity funds including CVC Capital Partners Ltd., people familiar with the matter said last week. CVC and Carlyle Group LP were awaiting the outcome of the property review after being approached about working with members of the founding family of the 115-year-old company about taking the grocer private, the people have said.

“Today’s announcement should reduce the likelihood of a bid,” said Darren Shirley, an analyst at Shore Capital in Liverpool, England. After cutting prices and reducing its margin, Morrison will find it difficult to meet rental payments if property is spun off, he said. “Property is only valuable if it’s sustained by the cash flow of the food retail business.”

Food Provenance

Chief Executive Officer Dalton Philips declined to comment on reports of the family’s approach and told journalists that management hadn’t met with the family in recent weeks.

In his four years as CEO, Philips has focused on Morrison’s fresh-food offering, promoting the provenance of its fresh meats and revamping the stores with in-store butchers, fishmongers, cheese counters and produce presented in wooden crates and baskets. That has come at the same time that discounters have made a push into the market. Aldi’s sales rose a record 34 percent in the latest 12-week period, Kantar Worldpanel said March 11.

“There is a fundamental change in how consumers view discounters, the perception has changed,” Philips said today on a call with journalists. “There is a new price norm with consumers increasingly shopping across all formats and they have a new expectation on price.”

Late Online

Philips has repeatedly blamed Morrison’s late entry into convenience and online operations -- the grocer started its Internet business on Jan. 10 and has about 100 convenience stores -- for the company’s failing fortunes. By comparison, market leader Tesco Plc (TSCO) started its U.K. home-delivery business 17 years ago and the unit is now profitable. Tesco also has 1,601 Tesco Express stores.

Morrison follows Tesco and Wal-Mart Stores Inc. (WMT)’s U.K. arm Asda in lowering prices. Asda in November pledged a 1.25 billion-pound investment to help reposition its pricing while Tesco last month said it will offer permanently cheaper prices on some items to replace overly complex promotions.

The increased focus on online and smaller shops at Morrison means that the company will reduce capital expenditure to about 550 million pounds in the current year and about 400 million pounds annually thereafter. The company will generate 2 billion pounds in free cash flow over the next three years.

Chairman Ian Gibson said that the company’s board “backs the plan and the executive.”

Morrison will also sell its Kiddicare business, a baby-equipment retailer, which it acquired in 2011 for 70 million pounds. The unit led to a charge of 163 million pounds last year amid a “disappointing” performance. The company will also sell its stake in Fresh Direct, an online grocery business based in New York, at an “appropriate time.”

To contact the reporter on this story: Gabi Thesing in London at gthesing@bloomberg.net

To contact the editors responsible for this story: Celeste Perri at cperri@bloomberg.net David Risser

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