Profits warning shock from Morrison

SUPERMARKETS group Wm Morrison rocked the market with another Safeway shocker today, warning that accounting problems with last year's £3bn acquisition will hit profits by £40m.

The warning, which comes a week before the group is due to report full-year results, astonished retail analysts and looks certain to put pressure on finance director Martin Ackroyd for not having discovered the shortfall earlier.

Having indicated in January that pre-exceptional profits would be around £370m, the group now says they will be in the £320m to £330m range.

The problems, which the group says arose as part of the annual audit process, relate to Safeway's practice of taking supplier payments at the start of a contract rather than at the end as Morrisons does.

This means up to £40m of payments cannot be guaranteed, and the group has decided to take a provision for the same amount 'until the treatment of these debit balances has been determined'.

Sir Ken Morrison, the 72-year-old chairman of the group, was refusing to talk to the City today, and the group declined any further comment on the shock announcement. It promised an update on the current outlook next week, 'including the success of the Safeway conversion process, in an increasingly competitive market'.

There have been reports of continued poor trading at the group in recent weeks, particularly at the Safeway stores. In January the group, Britain's fourth-largest supermarkets chain, warned that sales growth in its core Morrisons chain had slowed to just 0.1% over the crucial Christmas period.

It has been struggling to convert the underperforming Safeway chain, which has also distracted management attention from the rest of the business. Its results next week will include hefty exceptional items of £100m, the cost of integrating the Safeway business, including store conversions and redundancy payments.

Shares in Morrisons tumbled 11p to 201p as City analysts blasted the group. Iain McDonald at Numis said: 'A pretty staggering profit warning ahead of next week's final results, which must raise massive questions over whether the management has control of the Safeway business and must, at least, put pressure on finance director Martin Ackroyd.'

He added: 'We find it astonishing this should only become apparent a week before final results are announced and over six weeks after the company's year-end.'

McDonald is cutting his forecast for the year to end-January from £370m to £330m but leaving his current-year forecast at £465m.