FFMA- Morrisons PDF

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Analysis of Financial statements of last 3 years...

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2083107

Masters Programmes Assignment Cover Sheet Submitted by: 2083107 Date Sent: 5th November 2020 Module Title: Foundations of Financial and Management Accounting Module Code: IB9AXM Date/Year of Module: 2020-21 Submission Deadline: 5th November 2020 Word Count: 999 Number of Pages: 7 Question: Morrisons is the fourth the largest supermarket in the UK. It has undergone a series of restructuring programmes, 'fix, rebuild, and grow', and a change in top management team since 2014/15 fiscal year. Based on the available financial information and news coverage of Morrisons, evaluate Morrisons' past 3-year performance.

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2083107 The supermarket industry in the UK is going through some turbulent times and the market participants are having to take tough measures to maintain their share of the pie. After the exceptional year of 2018-19, where a plethora of factors like the FIFA World Cup, warm weather and a Royal Wedding contributed to substantial increase in sales across the sector, it was always going to be a challenging year ahead. But the problems were exacerbated with various macro headwinds, for instance, Brexit and its associated uncertainty, the mid-December elections, and Covid-19, among others. These led to a weaker consumer sentiment and a fall in demand (Figure 1).

Figure 1: GfK UK Consumer Confidence from June’18 to December’19

WM Morrison Supermarkets plc (hereinafter Morrisons), the fourth largest supermarket in UK, has not been an exception to the general trend and has also observed a slowdown in its growth momentum. The firm has been undergoing a restructuring programme since 2014-15 as part of its “Fix, Rebuild and Grow” strategy. This has led to an uptick in revenue by 10% over a three-year period (£16,122 million in 2015/16 to £17,735 million in 2018/19). However, the top-line has dipped by 1.1% like for like in the year gone-by (0.8% excluding fuel). In addition to the aforesaid macro-factors, David Potts – CEO of Morrisons – indicated that the firm had not discounted as much as it did previously in the 2019 festive period compared to its peers, and held back from using Black Friday as a springboard to boost autumn and festive sales (Financial Times 2020). This combined with the uncertainty surrounding Brexit, the possibility of a no deal exit and weak consumer demand contributed to Morrisons slowdown and an increase in sales for its competitors such as Aldi and Lidl. Although supermarket sales fell, the introduction of a new phase, “Sustain”, and a new priority, “Naturally Digital”, in its restructuring programme helped the firm recover

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2083107 some of the fall through online, wholesale and non-food channels (for example, the ‘Nutmeg’ clothing line).

On the other hand, the firm has been able to keep a tight leash on cost of sales (COS). A closer look at the common size trend analysis (Table 1A in Appendix) reveals that the firm has maintained the COS (as a percentage of sales) around 96.1% in the last two years, down from 96.3% in 2017/18, showing its ability to control cost despite the inflationary conditions in the economy (Figure 1A). This could be a result of the vertically integrated supply chain that the firm has adopted, which not only helps them control costs but also differentiates them from its competitors by offering the customer a unique shopping experience - a large portion of its food is sourced organically and sold as ready to eat via the market street. According to the annual report for 2019/20, 92% of its customers shop at the market street and it is a key reason they buy from Morrisons. Successful cost and expense management over years has led to a 15% jump in its underlying EBIT in the last two years, thereby confirming the rising trend in its operating results (£445 million in 2017/18 to £513 million in 2019/20). The interest coverage ratio (EBIT/Finance cost) has also increased from 4.25 to 4.62 in the current year (Table 1A). Hence, we can see that Morrisons is able to maintain discipline and control in relation to costs and has achieved growth in a leaner, more efficient and sustainable manner. This is clearly demonstrated by the increase in its underlying Earnings Per Share (EPS) from 12.19 to 13.18 pence per share over the last two years (Table 2A).

Furthermore, there has been a considerable increase (£45 million) in net cash flow from operations in 2019/20 (£781 million in 18/19 to £826 million in 19/20), which shows the firm’s ability to retain its position in a difficult and competitive market. Consequently, this has enabled Morrisons to both cover the extra capital expenditure and re-pay excess capital back to its shareholders in the form of higher (ordinary) dividends, in line with its capital allocation framework. Additionally, net repayment of borrowings to the tune of £207 million (Table 3A) over a period of 3 years has helped reduce finance costs, leading to a considerable expansion in underlying profit before tax from £325 million in 2016/17 to £408 million in 2019/20 – representing a 25% increase.

One of the aims of the 2014/15 restructuring programme was to improve the balance sheet and to make the business more efficient over the next few years. This goal has been achieved to a large extent, as suggested by the balance sheet figures. Debt-Equity ratio (Total liabilities/Equity) has been reduced from 1.46 in 2017/18 to 1.40 in 2018/19 on the back of considerable cutbacks in long term borrowings (Table 4A). Simultaneously, working 3

2083107 capital has gone from (1805) in 2017/18 to (2077) in 2019/20 - a decrease of £272 million. These numbers show that the firm has replaced its long-term borrowings with short term finances from external creditors (in particular, through negotiations with suppliers leading to a £130 million increase in trade payables) and has achieved cost efficiencies over the past three years. Greater levels of Plant, Property and Equipment (£120 million increase over two years), leaner inventories and maintenance of strong cash balances have added to the robustness of the balance sheet, making it well rounded.

Overall, the supermarket company has been able to maintain a somewhat similar top line over the last three years while improving the bottom line by achieving cost efficiencies in its operations. The introduction of a fourth phase called “Sustain” by the top management further signals that the firm has been largely successful in its restructuring efforts. In the coming years, the company can look towards building on this leaner and more agile business structure and pursue avenues that deliver growth both in terms of revenue and profit, such as promoting online sales in partnership with Amazon and broadening the business to non-food items.

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2083107 Appendix

Table 1A: Common Size and Trend Analysis of the underlying Income Statement * Income Statement Particulars/Year Revenue Cost of sales Gross profit Other operating income P/L on disposal of properties Administrative expenses Operating profit or EBIT Finance cost finance income Profit from joint venture Profit before taxation Taxation Profit for the financial year + Restated Interest Coverage Ratio

Year (Underlying) 19/20 18/19+ 17/18 17536 17735 17262 -16855 -17039 -16629 681 696 633 94 88 78 0 0 0

16/17 16317 -15713 604 76 32

Trend Analysis (%) 19/20 18/19+ 17/18 -1.12 2.74 5.79 -1.08 2.47 5.83 -2.16 9.95 4.80 6.82 12.82 2.63

Common Size Analysis 19/20 18/19+ 17/18 100.00 100.00 100.00 -96.12 -96.08 -96.33 3.88 3.92 3.67 0.54 0.50 0.45

-262

-274

-266

-244

-4.38

3.01

9.02

-1.49

-1.54

-1.54

513 -111 5 1

510 -120 5 1

445 -78 5 2

468 -160 15 2

0.59 -7.50 0.00 0.00

14.61 53.85 0.00 -50.00

-4.91 -51.25 -66.67 0.00

2.93 -0.63 0.03 0.01

2.88 -0.68 0.03 0.01

2.58 -0.45 0.03 0.01

408 -94 314

396 -93 303

374 -89 285

325 -20 305

3.03 1.08 3.63

5.88 4.49 6.32

15.08 345.00 -6.56

2.33 -0.54 1.79

2.23 -0.52 1.71

2.17 -0.52 1.65

4.62

4.25

Figure 1A: Retail Price Index #

Table 2A: Earnings Per Share (EPS) * Year Particulars Basic Diluted

19/20 U/L Total 13.18 14.60 14.44

18/19 (Restated) U/L Total 12.85 9.89 9.67

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17/18 U/L Total 12.19 13.30 13.03

2083107 Table 3A: Net Repayment of Borrowings * Particulars/Year New Borrowings Repayment of Borrowings Total + Restated

18/19+ 275 -306 -31

19/20 347 -278 69

17/18 0 -245 -245

Total 622 -829 -207

.

Table 4A: Statement of Financial Position for the last 3 years * +Restated

Balance Sheet Particulars Equities and Liabilities Shareholder's Equity Share Capital Share Premium Capital Redemption Reserve Merger Reserve Retained Earnings

Liabilities Non-Current Liabilities Borrowings Lease Liabilities Derivative Financial Liabilities Retirement Benefit Deficit Deferred tax liabilities Provisions

Current Liabilities Trade & Other Payables Borrowings Lease Liabilities Derivative Financial Liabilities Current Tax Liabilities

Total

19/20

240 192 39 2578 1492 4541

1108 1304 7

18/19+

17/18

237

236

178

159

39

39

2578

2578

1293

1238

4325

Assets Non-Current Assets Goodwill and intangibles Property, Plant & Equipment Right of use Assets Investment Property Retirement benefit Surplus Investment in Joint Venture Trade & other receivables Derivative Financial Assets

4250

1110

1245

1328

1354

2

1

42

18

414

415

96

99

2992

3132

3051 237 72 36

3070

2921

178

72

69

59

5

13

0 3396

27

15

3349

3080

10920

10666

10462

16 472 76 2983

Particulars

Current Assets Inventories Trade & other receivables Derivative Financial Assets Cash & Cash Equivalents

Assets held for re-sale

Total

* Data taken from Annual Report and Financial statements 2019/20. # Data taken from Office for National Statistics (ONS).

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19/20

18/19+

17/18

381 7147 942 58 960 39 71 0 9598

404

428

7094

7027

929

970

60

69

730

612

47

53

8

8

15

16

9287

9183

660

713

686

353 1 305 1319

344

247

19

15

264

327

1340

1275

3

39

4

10920

10666

10462

2083107

References

Trading Economics (2020) United Kingdom consumer confidence. [Online] Available from: https://tradingeconomics.com/united-kingdom/consumer-confidence (Accessed 01 November 2020).

Financial Times (2020) Morrisons supermarket chain hit by drop in group sales. [Online] Available from: https://www.ft.com/content/6c81f470-30a9-11ea-9703-eea0cae3f0de (Accessed 01 November 2020).

WM Morrisons Supermarket plc (2020) Annual Report and Financial statements 2019/20. [Online] Available from: https://www.morrisons-corporate.com/investor-centre/annualreport/ (Accessed 31 October 2020).

WM Morrisons Supermarket plc (2020) Preliminary Results Presentation 2019/20. [Online] Available from: https://www.morrisons-corporate.com/investor-centre/presentations/ (Accessed 31 October 2020).

Office for National Statistics (2020) Retail Price Index (RPI) in the United Kingdom (UK) from January 2010 to September 2020. [Online] Available from: https://www.statista.com/statistics/306748/united-kingdom-uk-monthly-retail-priceindex-rpi/ (Accessed 01 November 2020).

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