City News: Morrisons shows surge in demand is double-edged sword

The coronavirus crisis might have sent grocery sales soaring so far this year, but Morrisons is the latest supermarket to prove it has been a double-edged sword.

The retailer on Thursday revealed a jump in first-half sales could not mitigate the extra costs caused by the coronavirus and the rapid shifts in consumer behaviour, as it reported a double-digit fall in its profitability.

It saw an 8.7% jump in group like-for-like sales (excl fuel) in the six months to 2 August, with retail driving growth of 7.9% and wholesale contributing 0.8%. Its second quarter “accelerated significantly” compared with the first quarter, with group like-for-likes (excl fuel) up 12.3% and retail growth of 11.1%, though it said there was “some moderation” towards the end of the quarter as the eat-out market began to open up.

However, despite booming sales, profit before tax and exceptionals was down 25.3% to £148m, driven by an extra £62m of Covid-19 costs. In total it incurred direct coronavirus costs of £155m that were only part-mitigated by four months of business rates relief of £93m.

Morrisons shares dropped by 4.4% by lunchtime on Thursday back to 186.4p – the lowest level since late July – as investors reacted.

However, analysts were more upbeat – pointing to guidance indicating that greater business rates relief in the second half will totally mitigate the jump in coronavirus costs for the full-year period.

“Morrisons’ defensive merits are today confirmed, underpinned by a fast-growing online offer and ongoing progress in strengthening the core proposition,” said Jefferies. Shore Capital added: “The group has not wasted this crisis, going on to materially enhance its brand reputation through its actions, revolutionise its online capabilities, including the strengthening of its relations with Amazon, building its capability and sharpening its value proposition.”

Hargreaves Lansdown suggested its smaller online operations then its peers could offer opportunities for growth: “Capacity for Morrison’s online and home delivery channels grew five-fold in the half, and starting from a lower base means there’s more room to grow.”