Its been an incredibly difficult year for investors in Morrisons (LSE: MRW). Indeed, shares in the Bradford-based supermarket have fallen by 32% during the course of 2014, while the FTSE 100 has delivered a flat performance. Certainly, the supermarket sector is going through an extremely competitive and highly challenging period. However, there could be a lot of light at the end of the tunnel for holders of shares in Morrisons. Heres why.
Although earnings are forecast to fall by 52% in the current year, Morrisons is forecast to grow its bottom line by 18% next year. Certainly, profit will still be a lot lower in two years time than it is now, but the reasons for the bounce in profit next year could hold the key to the companys longer-term future.
At present, Morrisons is significantly behind its main rivals when it comes to online shopping and convenience stores. Unlike Tesco and J Sainsbury, Morrisons has had absolutely no online presence until earlier this year, and still only delivers to a relatively small area. This has meant that the company has missed out on a fast-growing area for the last ten years, while the likes of Tesco and J Sainsbury are still reporting relatively strong sales growth in this space.
Its a similar story with convenience stores. Morrisons had only a handful until a year ago. The company is now opening them at the rate of roughly one every week or two, which means that next year it should have a considerable portfolio of smaller stores with which to rival its peers. As with online shopping, convenience stores have proven to be a high-growth area, as people top-up their weekly shop, which Morrisons has had no presence in.
An Improving Economic Outlook
At present, Morrisons is engaging in a price war with its rivals and is reinvesting in pricing, which hurts the bottom line in the short run. However, with the UK economy continuing its upward trajectory, Morrisons may not have to focus on discount retailers to such a great extent moving forward. Thats because, just as the habits of shoppers changed during the credit crunch, they could change again during a period of economic growth. In other words, the recession made many shoppers focus on price above all else, while low inflation and wage rises could help to shift their attention on to quality and service, which could provide a boost to Morrisons.
Certainly, investing in Morrisons is not without risk. The online and convenience stores could disappoint, while shoppers attitudes may take some time to change. However, with shares having fallen by 32% in the last eight months alone, the potential rewards seem to outweigh the possible risks. As such, Morrisons could deliver a positive surprise in future.
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Peter Stephens owns shares of Morrisons, Tesco and J Sainsbury. The Motley Fool UK owns shares in Tesco. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.