Morrisons shares: Here's what's driving this recovery

The shares have raced to a seven-week high on these numbers. Our head of markets explains why.

It has been a long road for Morrisons (LSE:MRW) in transforming its business, but with each update of late there have been further incremental improvements.

For the half-year, like-for-like sales eked out a 0.2% gain overall, coming against some tough comparatives (4.9%) given last year's summer weather and the fillip of the World Cup.

The additional contribution from Wholesale and the online business helps the overall picture, with the former likely to benefit from an extended tie-up with Amazon as announced today.

In addition, there is a reduction in net debt accompanied by an increase in cash flow, with the result that the announcement of a special dividend, bolstering the current yield of 4.5%, is testament to the company's healthy financial position, not least in terms of its balance sheet.

By the same token, the supermarket sector requires running even to keep still at this level of competition. Plotted against the likes of Lidl and Aldi at its price point, still lagging in terms of its online offering as compared to others and requiring attention in its convenience store presence, Morrisons is still faced with immense challenges.

Source: TradingView Past performance is not a guide to future performance

From a trading perspective, the second quarter saw a dip in like-for-like sales, which should not become a trend given the outlook statement. That being said, food shoppers are notoriously price-conscious and, as such, the likes of Morrisons will be under pressure whatever the outcome of the Brexit negotiations given the likely hit to the UK economy.

However, given the hugely competitive sector in which Morrisons operates, this update must be seen as positive progress and has been warmly received. The share price hike in early trade is meaningful, but is far from overturning the decline of 27% over the last year, as compared to a marginal 0.3% gain for the wider FTSE 100 index, and which is down 14% in the last six months alone.

The share price reaction acknowledges the progress the company is making, whereas the market consensus of the shares as a 'hold', with better value being seen elsewhere, is a reflection of the inevitable challenges to come.