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Despite EBIT Margin Decline, Wm Morrison Raises Dividend and Repurchases Shares

Written by on April 10, 2013

Having previously provided sales results, Wm Morrison Supermarkets reported more detailed financial results for fiscal 2012 (ending February 3, 2013) that support our thesis of operating margin declines. As a result, we do not plan to make any major changes to the assumptions in our discounted cash flow model, which drives our fair value estimate of GBX 300.

Wm Morrison does not possess an economic moat, so at some point the company is going to have to either drive sales at the expense of gross margin or face expense deleverage from negative like-for-like sales after further cost findings are no longer feasible. Morrison already reported negative 2.1% like-for-like sales for the year.

The company’s strategic decision at the start of the year not to match competitor pricing in an effort to protect profit margin likely explains some of the comps deceleration. Still, Wm Morrison managed to keep administrative expenses as a percent of sales essentially flat at 1.9% versus last year, despite the same-stores sales decline. However, the gross margin rate contracted to 6.7%, down 23 basis points compared to the year-ago period, and was the main driver of the operating margin decline of nearly 30 basis points (20 basis points excluding fuel). The EBIT margin decline to 5.2% was in line with our forecast when we assumed coverage.

The company raised its dividend by about 10% to 11.8 pence, up from 10.7 pence in 2011. Wm Morrison also repurchased about 159 million shares to deliver a 2% increase in diluted earnings per share, or EPS, to 26.57 pence, which offset the 6% and 2% declines in net earnings and operating income, respectively. Morrison reported underlying EPS of 27.3 pence, which excludes property disposals, multi-channel and convenience development costs, and IAS19 pension interest.

 

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