Morrisons yesterday warned that its sales and profit for the year could be impacted by the war in Ukraine and rising inflation.
The supermarket group, which was acquired last year by private equity firm CD&R, highlighted that the Russia-Ukraine conflict and increasing prices had hit consumer spending and trading in its stores since the beginning of February.
“We are taking steps to mitigate the impact of these developments on our EBITDA for the remainder of the year,” it said in a results statement.
“Unless these conditions improve, the impact of these developments could have a material adverse effect on our sales and EBITDA for the year.”
Morrisons, which is looking to refinance the debt taken on from the £7bn takeover, revealed that it had already seen a fall in earnings for the three months to 30 January. In a statement issued before a meeting with investors who helped finance the deal, the retailer said underlying quarterly profits had slipped almost 10% to £316m on sales which rose from £4.5bn to £4.6bn. Adjusted core earnings for the full year came in at £941m.
The statement highlights how supermarkets are facing a struggle to offset soaring inflation on everyday basics. Disruption to supply chains caused by the war in Ukraine has added to existing pressures resulting from a surge in consumer demand as pandemic restrictions have unwound in many countries. Rising energy prices, as well as increased labour costs in the UK linked to Brexit and the pandemic, are also adding to costs for businesses and fuelling inflation.
Surging grocery prices appear to be forcing consumers to adjust their shopping habits to save money, including shifting their spend to discounters and own-label. Morrisons looks to be one of the biggest losers from consumers trading down with latest data from Kantar showing the retailer’s sales fell 11.5% over the 12 weeks to 20 March, more than any other major chain.
Meanwhile, it was also reported yesterday that the new owners of Morrisons have given the go-ahead for plans to sell some of the group’s property portfolio worth around £500m.
According to Sky News, the company is in the process of appointing advisers to oversee the disposal of a substantial chunk of Morrisons’ manufacturing and distribution facilities across the UK. City sources said that the plans had been under discussion for some time, with a formal process expected to begin imminently.
The property auction will be among the most significant moves to date sanctioned by CD&R since it completed its takeover last October. As part of efforts to secure the backing of pension trustees and other stakeholders, the private equity firm had pledged not to undertake substantial sale & leasebacks of Morrisons’ store portfolio. However, the undertakings given did not incorporate its manufacturing or logistics property assets and were only binding for 12 months following the completion of the deal.
CD&R is currently contending with an investigation into the impact of its Morrisons takeover on competition in the petrol forecourt market. The private equity firm also owns Motor Fuel Group (MFG), the largest independent operator of petrol stations in the country.
Last month, the Competition and Markets Authority (CMA) said it had found that the deal “raises competition concerns in relation to the supply of petrol and diesel in 121 local areas across England, Scotland and Wales”. CD&R must offer proposals to the regulator to address the competition concerns, or the CMA will refer the case to a full Phase 2 investigation.
However, recent reports have said the CD&R wants to sell the MFG business in a £5bn auction. City sources expect the sale process to kick off in the coming weeks, although it could be delayed given the state of credit markets.
NAM Implications:
- Given that PE companies are measured by EBITDA rather than the pre-tax net profit…
- …then selling assets…
- …and leasing back where necessary is an obvious way of improving their performance.
- i.e. meaning a substantial chunk of Morrisons’ manufacturing and distribution facilities across the UK is on the block….
- And given that most takeovers cost more than first intended…
- …a keen focus on financial performance becomes part of the supplier-retailer relationship.
- NamNews subscribers see: Moving from Managing a Traditionally Owned to a PE Owned Mult
