Morrisons only dispels retail gloom a bit

It’s (still) all about prices

Morrisons’ update casts only a slightly better light over all-important Christmas retailing after a clutch of disappointing releases in recent weeks, as consumers turn more cautious. The UK’s Number 3 supermarket comfortably topped the 1.8% same-store sales rise analysts wanted to see, with growth of 2.8% over ten weeks to 7^th January. Morrisons pointed to initiatives like enhanced in-store services and automated ordering, improving availability and bringing a more attractive customer experience. Morrisons did not however, skim over the effect of “more competitive” pricing. And with shares jumping some 5% initially, only to trade just 1.5% higher by late morning, investors are pointing to concerns that retailers are falling back on less discriminate discounting again.

Tesco wins the headlines

To be sure, there was noise on Tuesday morning from rival sets of grocery data for the festive season. Both Nielsen and Kantar crowned Tesco winner over the final 3 months of 2017. But it was telling the news didn’t lift the dominant supermarket’s stock. No mysteries here. The bugbears of established supermarkets, Aldi and Lidl, were on the march again, resuming their market share grab during the quarter after a patchy showing last year. They did not take share from Tesco during the quarter. But the time when discounters routinely achieved just that—during the similarly problematic price environment of 2014-2015—is still fresh in investors’ minds. Tesco reports its own Christmas trading on Thursday, following Sainsbury’s on Wednesday.

Inflation may “taper down”, scepticism may not

True, Morrisons reaffirmed 2017/18 profit guidance of £371m on Tuesday, keeping a floor under pessimism. Its CFO even assured that inflation would “taper down” in the new financial year. That coheres with a broad expectation that price trends have peaked for now. If such projections are correct, large retailers could soon have more leeway for redoubling efforts to improve their offerings and calibrate price mixes more sharply.

Even then, their battle with investor confidence will remain uphill. It’s worth noting the tide of short trades on the sector hasn’t abated much from ‘crisis’ highs seen over 2014-15, including for Morrisons. After all, efficiency drives and cost reduction only took these groups so far in the face of evolutionary changes in customer behaviour and pricing. Morrisons (and rivals) will almost certainly meet profit expectations. But shares in all three leading grocers face another year of drifting lower, as scepticism sets back in.

WM. Morrison Supermarket technical analysis

Morrisons’ technical price chart depicts continuing recoupment of sentiment from the medium-term downtrend between late August and November last year. On the optimistic side shares have hurdled 230p. That was resistance busted last January only to be relinquished in October. Unfortunately, the price gap between Monday’s high and Tuesday’s low will almost certainly be magnetic in the near term. Since it coincides with a sharp rejection of overbought levels—see slow stochastic oscillator sub-chart—price looks to ease in the very near term. However, if the spell of 230p has in fact been broken, Morrisons’ target further out should be on the upside. A shallow pullback could be followed by a move up to clearer resistance at 249.9p. With rising currents on the near horizon (21-day exponential moving average; red dotted line) and an underlying trend (200-day moving average; blue line) that’s flattening after drifting lower, Morrison’s prospects look in the balance. The stock’s ability to clear rectangular resistance between the 230p pivot and 239p will be critical for its continued ascent. Trade below 230p would call for a retest of 205p—last year’s low—and possibly 202p—the kick-off point of the up leg commencing September 2016.