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Stock up in Morrisons bargain basement

Some members of the Morrisons board will have used August to get away from work. But Dalton Philips, the supermarket's new chief executive, has had to ponder the long-term direction of the UK's fourth biggest grocer.

Mr Philips, previously chief operating officer at the Canadian grocer Loblaw, will on 9 September provide his first thoughts on his strategic plan for the 425-store chain, alongside its interim results. The Irishman has plenty to shoot at. For instance, the grocer still does not have an online grocery offer, a financial services arm, convenience stores, a loyalty card, a presence overseas or a non-food offer that could be compared to the scale of Tesco's, Sainsbury's or Asda's.

While analysts at Bank of America Merrill Lynch expect to hear Mr Philips' initial thoughts next month on online grocery and "stretching" its formats, possibly into the convenience sector, they are not expecting major announcements until after it runs trials in these areas. Nor does the investment bank believe a whole new strategy for non-food or international is in the immediate pipeline.

Instead, Mr Philips may go after productivity gains – such as sharpening up its private label and shelf life strategy, as well its labour scheduling processes to improve in-store labour costs – to boost its margins.

While his strategic vision will take time to deliver, there are plenty of reasons why Morrisons remains a compelling investment case. Despite its underlying sales growth falling back to 0.8 per cent for the 12 weeks to 2 May, largely due to low food inflation, more recent industry data points to Morrisons continuing to grow faster than its big three rivals.

Moreover, the grocer trades on a 2011 price to earnings ratio of 11.9, which makes it one of the cheapest European food retail stocks. Morrisons will face a constrained consumer over the next year, but its plans to become a "nationwide" grocer by further expanding in the south, progressive dividend policy and robust financial position make us buyers even before Mr Philips steps up to the plate next month.

Source : Stephen Foley - The Independent

10 August 2010
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