Wm Morrison Supermarkets PLC MRW

Wm Morrison has moved into an investing phase to address structural competitive disadvantages. Unlike most of its industry peers in the United Kingdom, the company has yet to develop a significant online and small-store presence. However, by the end of this year, Morrison plans to launch an online food offering and have about 100 convenience stores open. As a result, we expect capital expenditures as percentage of revenues to reach near 6% in fiscal 2013 (ending January 2014), and to remain at historically elevated levels as it ramps up its online and convenience store presence. Management also has reversed its earlier strategic decision not to match competitor pricing in an effort to protect profit margins, and instead will now focus on sales growth. We view this as a positive despite the expected gross margin hit. Wm Morrison's vertically integrated supply chain and cost reduction initiatives should help offset some but not all of the profit margin pressure we anticipate. In our view, the company does not possess an economic moat to successfully defend market share with further operating margin contraction.