Morrisons battling higher costs and sales surge at B&Q owner Kingfisher

“Following a mixed session on Wall Street last night, markets in the UK, Europe and Asia struggled to make any significant progress on Tuesday. Stocks in Hong Kong fell 1.6% while Germany’s Dax index was flat,” says Russ Mould, Investment Director at AJ Bell.

“The FTSE 100 fared slightly better in relative terms, nudging ahead 0.4% to 5,960 in early trading. Banks and miners acted as the main drag on the index whereas the main gains were found among telecoms, utilities and pharmaceutical stocks. Vodafone led the list of risers with investors relieved it is still paying dividends."

Morrisons

“It says something when a business experiencing a surge in demand continues to feels it cannot fulfil a desire to pay a special dividend, such as is the case with Morrisons. It deferred the decision in March and has now done so again.

“The supermarket group is a like an iceberg – you can get a sense of Morrisons’ strong sales mounting up just by seeing the big queues for its stores and also how its online delivery slots are quickly snapped up. But below the water level there are several underappreciated factors acting as a drag on the company.

“Morrisons is holding on to its spare cash for the time being as there are many demands for this money in the business. Its tremendous efforts to help meet customer demand are incurring extra costs and profits are also suffering from a sharp drop in fuel sales.

“This means both Morrisons and Sainsbury’s are now on the growing list of companies deferring decisions on the dividend, something that may surprise people given supermarkets are one of the few industry sectors to have been consistently operating throughout the pandemic.

“With lockdown restrictions starting to be slowly eased, one might expect a pick-up in fuel sales, particularly as Prime Minister Boris Johnson has encouraged people to travel by car rather than public transport as they get return to work.

“That should provide some relief to Morrisons, particularly as motorists should also be enticed by petrol prices being cut to below £1 a litre, the first time fuel has been available nationally at that price for four years.”

Kingfisher

“Most people are stuck at home staring at their four walls and no doubt deciding they want to improve what they see. The resulting revival in DIY might even help B&Q-owner Kingfisher’s own renovation project.

“The company has been a fixer-upper for a number of years, with falling sales and declining margins the corporate equivalent of rising damp and dry rot. Former CEO Veronique Laury was just the latest in a series of names who tried and failed to tackle these problems.

“New boss Thierry Garnier may have endured a baptism of fire as the lockdown initially saw sales drop by three quarters, but sales surged in early May as stores reopened and people made increasing use of its online and click and collect channels.

“Kingfisher’s stores, including its Screwfix outlets in the UK and Castorama and Brico Depot sites in France, are better positioned than other retailers to adapt to social distancing because they typically cover a reasonably large footprint.

“Garnier and his team also deserve some credit to adapting quickly to the new circumstances and they need to apply the same agility and ingenuity to ensure an opportunity to win the loyalty of new and returning customers does not go to waste.

“Once we are through the worst of the coronavirus, Kingfisher must also resume its focus on delivering medium-term goals around unifying its product range and increasing the share of own-brand products in its stores.

“Particularly as the downturn in the economy associated with the coronavirus crisis will bring its own pressures.”

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