Morrisons’ shares fell yesterday after analysts at Goldman Sachs issued a negative note on the sector and highlighted the challenges faced by the UK’s No.4 grocer.

The bank downgraded its recommendation on Morrisons from ‘buy’ to ‘neutral’ and forecast lower margins, saying the stock has now reached its target price. Goldman also reiterated ‘sell’ ratings on rivals Sainsbury and Tesco, as it warned of further tough times ahead: “We continue to believe that the UK grocers face structural demand shifts which will mean permanently lower than historical returns in the absence of invested capital reductions. A small recent slowdown in growth rate of the discounters has come alongside a more aggressive profit rebasing than we forecast by Tesco. The average 15% share price rise year to date for the group suggests growth, long-term margin and capital expenditure assumptions which we do not believe are achievable.”

It added: “A significant pick-up in market growth is needed to drive sales higher at the listed grocers' core large stores, but recent price-cutting campaigns and input cost deflation limit inflationary growth.”

On Morrisons in particular, Goldman said: “Morrisons has been the most proactive of the UK grocers in aggressively investing profitability in prices and services to reverse the trend in declining footfall. However, despite improvement, like-for-likes remain negative. Having cut dividend guidance for 2016, we believe new Chief Executive David Potts has more capital flexibility and will use this to invest in the operations of the core store business to further drive store sales. This is consistent with comments from the chairman that driving positive volumes is essential to long-term profitability recovery.

“While we forecast this strategy will ultimately lead to improvement in like-for-like growth, additional investments in price and/or in-store service lead us to forecast lower margins in the nearer term. The net effect does not move our target price materially, but the stock has now reached our target price. We therefore downgrade Morrisons to neutral from buy on limited upside potential relative to our coverage.”

The downgrade comes amid moves by Morrisons to streamline its operations to take on the burgeoning success of its discount rivals. It was revealed yesterday that Morrisons was axing a further 20 senior staff from its next level of management. The move follows the group’s decision last week to cut five members from its 11-strong board.

Further analysis:
Morrisons' recovery plan: Go back to the future – read the full article on the Reuters website