Christmas sales put a sparkle in Morrisons’ results

Covid-19 pressure drags on festive boost, but supermarket chain is in a good position to tackle 2021.

Sales of champagne and salmon may have been a festive feature for customers and led to an overall sales boost, but the overall position for supermarket chain Morrisons (LSE:MRW) is more finely balanced.

Champagne sales in particular rose 64%, while sales of entire salmon increased by 40%.

But lockdowns have not guaranteed a home run for the supermarkets, especially in terms of additional operational costs.

For Morrisons, an additional £10 million of Covid-19 costs take the running total to some £280 million, according to its third-quarter and Christmas trading update. Net debt has taken a further hit on lower fuel demand.

The previous decision to pay suppliers immediately added an extra £60 million to the overall debt figure. Brexit costs racked up another £65 million.

• ii view: Morrisons – profit down but dividend up

• Five AIM share tips for 2021

However, there are also some promising signs, some of which have been accelerated by the pandemic.

In particular, Morrisons is working hard to ramp up its online operations. While still lagging behind its rivals, there have been some early wins. Sales tripled in this period compared to the previous year.

A tie-up with Amazon (NASDAQ:AMZN) has both immediate and longer-term potential, while home delivery, click and collect, and the Deliveroo relationship each have a part to play.

Furthermore, despite the increase in net debt and the drain on working capital, much of the company’s store estate is freehold and there is a largely undrawn line of credit in the background which acts as a further buffer.

Excluding fuel, like-for-like sales were generally strong, with growth of 8.1% for the period and of 9.3% over Christmas and the New Year. Total sales also increased by a similar amount, with wholesale making another notable contribution, largely through the McColl’s business.

• Supermarket stocks get thumbs up from City traders

• Are you saving enough for retirement? Our calculator can help you find out

As such, the group has maintained its full-year pre-tax profit expectations of between £420 million and £440 million, excluding the rates payment. The dividend policy is evidence of management confidence.

The special dividend leads to a projected yield of around 6%, with the underlying dividend alone suggesting a yield of 3.7%. Both will be of interest to income-seeking investors.

The share price performance has been mixed, with a 6% drop over the last year comparing to a decline of 14% for the wider FTSE 100.

While Morrisons may not be the preferred play in the sector, the market consensus of the shares has nonetheless recently ticked higher, now coming in at a cautious ‘buy’.