Morrisons issues profits warning

British supermarket group Morrisons today warned annual profits would be substantially below expectations as trading flagged at unconverted Safeway stores.

The stores chain, which acquired the Safeway business earlier this year, said sales had fallen despite price cuts aimed at making the brand more competitive.

However, stores already converted to the Morrisons brand were performing better than expected, while the core Morrisons outlets continued to perform well.

Recent industry figures had already highlighted the challenge facing Morrisons as Safeway sales suffered.

Today’s trading statement showed that annual like-for-like sales at Safeways were down 7.2%, or 8.9% excluding petrol.

As a result, the group said: “It is likely that reported full-year profits for the current year will be substantially lower than current market expectations.”

Morrisons said a strategy to reduce high prices at the acquired chain had failed to halt the decline due to lagging sales volumes.

But there were signs that the situation was now stabilising with same-store sales in the five weeks to June 20 down 6.9%, compared with a fall of 13.8% in the five weeks to May 16.

The company also said the performance of Safeway stores already converted to the Morrisons format had exceeded expectations.

The four stores that have been transformed saw sales increase by an average of 36.8%, or 42.1% excluding petrol, compared with the same period last year. Before conversion, trading at these sites was down 5.6%.

The main conversion plan is to start as planned in August at the rate of three stores every week, with a total of 53 expected to be trading as Morrisons by the end of November.

Meanwhile, the core Morrisons stores saw same-store sales rise 9.2% in the 21 weeks to June 27, driven by an increase in customer numbers and the average transaction size.

Morrisons is the second UK supermarket to warn on profits in as many days.

Just yesterday Sainsbury’s issued a shock profits warning as it announced its chairman Peter Davis was quitting.

The value of shares in Morrisons already fell heavily yesterday as investors fretted over falling sales at Safeway.

Analyst Richard Ratner, at stockbroker Seymour Pierce, had previously expected annual pre-tax profits to come in at £590m (€883m) but cut this to £410m (€613.8m) in the light of today’s news.

He said, however, that the acquisition still made sense on a longer-term basis.