UK retailer Morrisons has continued its promising start to 2018 with the news that ratings agency Moody's has upgraded the retailer to a Baa2 rating (from Baa3).
The move follows strong Christmas and New Year sales at the retailer, which posted a 2.8% increase in sales over the ten week period to 7 January, with retail contributing 2.1% to this figure.
"Our decision to upgrade the ratings of Morrisons reflects a sustained period of improving operational performance by the company and a stronger credit profile," commented David Beadle, a Moody's Vice President - Senior Credit Officer and lead analyst for Morrisons.
"Morrisons cash generation and reduced debt, coupled with increasing profitability has resulted in credit metrics which support a Baa2 rating."
Sustained Improvement
In a statement, Moody's said that the upgrade reflects a 'sustained improvement' in both the financial results and credit profile of Morrisons; the latter benefiting from both an increase in the company's working capital and its property disposal programmes, which have led to a reduction in debt at the retailer.
'Over the last couple of years Morrisons has made good progress on a number of strategic initiatives which in combination have benefited the company's financial profile,' the ratings agency said. 'A series of programmes have facilitated price investment while the company has also focused on improving quality and serving customers better.'
Moody's also noted the retailer's improving online performance - according to a Morrisons statement, the group's online operation, Morrisons.com, saw sales up 10% over the Christmas period, boosted by its increased reach across the north of England.
'Morrisons has also notably recorded growth in online sales, with store-pick capabilities recently beginning to be rolled out to enhance the geographic reach of the Dordon CFC operated by Ocado Group plc (Ba3 stable).,' Mooody's noted. 'Revenue and profitability is also being enhanced by the continued development of various capital light wholesale agreements.'
Secondary Endorsement
Commenting on the announcement, leading analyst Clive Black of Shore Capital said that the upgrade is a "welcome secondary endorsement of the positive change programme that [chief executive] David Potts CBE & Co. are engineering at Morrisons".
As Shore Capital noted, Morrisons has now posted three years of consecutive like-for-like sales growth, good margin progress and positive free cash generation - all of which have pointed to the retailer becoming an increasingly 'resilient' operation.
Indeed, when David Potts, a former Tesco director, came into the role in February 2015, Morrisons was stagnating, on the back of a failed move upmarket, followed by a deep price cutting approach as the retailer sought to take on Aldi and Lidl.
Since then, backed by Morrisons vertically integrated supply chain structure, the retailer has very much turned the corner, developing a strong private label offering ('The Best') and taking on new wholesale supply contracts, such as its recent deal to supply McColl's Retail Group, as well as instigating a host of new revenue generating initiatives.
Forecasting strong medium-term growth for the business, Shore Capital's Black added that the "Moody's upgrade is, therefore, not unhelpful in this respect in bringing a bit more of a warm glow to the reputation of the Group's debt whilst also perhaps encouraging short sellers to reflect once again on the direction of travel of this increasingly resilient business that we forecast to deliver strong medium-term growth from balanced and broad based initiatives."
© 2018 European Supermarket Magazine – your source for the latest retail news. Article by Stephen Wynne-Jones. Click subscribe to sign up to ESM: The European Supermarket Magazine.
