Morrisons gloom shocks City

ANALYSTS rushed to downgrade forecasts for Wm Morrison today after the supermarkets chain issued a profit warning and admitted that it is having to work a lot harder to turn around its £3bn Safeway acquisition.

Morrisons revealed that it is to incur a £180m hit after a change in supplier terms this year. The disclosure was accompanied by a warning that sales in its newly acquired Safeway stores had experienced an 'accelerated decline' after being taken over.

The extent of the task facing Morrisons was evident in a statement to the stock market this morning which admitted that trading at Safeway had failed to live up to expectations.

Morrisons had planned to leave the Safeway trading strategy in place for several months while it took stock of the situation, but a sharp decline in sales meant that immediate action was necessary.

Steps included various cost-cutting measures but while these were being pursued sales dropped even more sharply. The accelerated sales decline saw like-for-like sales at Safeway in the five weeks to 11 April drop 4.8%, but this rose to 13.8% in the five week period to 16 May.

This figure is now being reduced, the company insisted but admitted that the full benefit of cost cutting won't now be felt until the next financial year.

Today‘s statement is a major disappointment for investors who had been hoping for some good news after competition authorities forced the company to offload 52 Safeway stores.

Investment bank Merrill Lynch said in a note that it 'struggled to see' how a sale of these stores will not affect profits.

The big surprise for Morrisons investors was in the size of the reduction of upfront income in the first half. Supplier income has always had a major impact on the results of Morrisons and Safeway but while Safeway always asked suppliers for money up front, Morrisons has traditiaonlly negotiated back end loaded supplier rebates.

Changing Safeway‘s policy in line with Morrison‘s means that Safeway‘s income will be about £180m adrift, only partially offset by a £50m gain due to a change in accounting policy.

This means profits for the first half of the year will be in the region of £120m-£125m, well adrift of previous City forecasts.

Morrisons also admitted that problems in integrating its accounting systems with those in Safeway mean that publication of its half-year results will be delayed from September to October.

Retail sector watchers expressed disappointment in the figures, which come just a day after rival Sainsbury parted company with chairman Sir Peter Davis.

One analyst said: 'The main Morrisons stores are in line with forecasts but the £180m figure is a surprise and not particularly good news. Worse, however, is how much Safeway has deteriorated. We all knew things were declining but some of the figures here are a real shock.'