A year or so ago, crisis-hit Morrisons (LSE: MRW) looked in terminal decline, bedevilled byfalling revenues, cash-strapped customers, board in-fighting and the general declinein UK grocery sales.
Morrisons was hit particularly hard by its higher exposure to economically struggling northern areas, and its failure to establish a strong identity elsewhere. It was embarrassinglylate to launch its internet channel. Even price cuts failed to boost sales. The company had lost its way.
Upgraded
Yet disaster appears to have been averted, for now. The share price is still falling, but is down just 3% over the last year, which looks respectable against the double-digit drops experienced by its bigsupermarket rivals. It is even attracting positive reviews from brokers.
New chief executive officer David Potts has been with Morrisons for barely six months but has already inspired broker UBS to upgrade the company, as customersnote improvedvalue for money and fresh food credentials. UBShas only upgraded Morrisons to neutral from sell, and lifted the target price 10p to 175p, marginally above todays price of 168p.
Morrisons isnt exactly a roaring success.Sales continue to fall, M-Local convenience stores are closing and its 8%bonanza yieldis doomed. The65% dividend cut will reduce next yearsforecast yield to just3.2%. It has a long way to go, butTesco (LSE: TSCO) has an even harder journey ahead of it.
Price Cuts
Tescos share price is down 18% in the last year alone asthe wheel of fortune continue to turn against the once mighty retailer. Its market share is also sliding, as Aldi and Lidlrelentlessly grab share, with scant sign that they have hit the growth wall yet.
The pressure on Tesco to cut prices in response will be relentless, but as Morgan Stanley has pointed out, closing the gap wont be easy. Personnel, depreciation and rent amounts toaround9% of Aldis sales income, buta relatively hefty 15% at Tesco. The living wage will only up the pressures on cost. Rents, wages and pensions are all rising, which is the last thing Tesco needs in todays wider deflationary era.
Shop Or Drop?
YetMorrisons shows that all isnt necessarily lost. Cutting space, canning store openings and closing underperforming stores could make Tesco a tighter, leaner operation. Its customers may start to notice incremental improvements in service and availability, as well as lower prices. A planned 25% cut in lines should boost volumes forthe 75% of products that survive the cull, and with boost luck margins as well. Offloading itsSouth Korean arm,data analysis businessDunnhumby andTesco Mobile should bring down netdebt.
This isnt a recommendation to buy Tesco. Frankly, I still wouldnt touch it myself, especially as there is an outside chance it may have to launch a rights issue. Butif you are tempted, Morrisons shows that fightbacks can start fromthe most unpromising positions.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.