UK's Morrisons warns of long road to recovery

By James Davey

LONDON (Reuters) - British supermarket Morrisons' (MRW.L) first-half profit plunged by more than a third to its lowest level in nine years, showing the scale of the task facing its new boss to revive the company's fortunes in a brutally competitive market.

The country's fourth-biggest grocer warned its turnaround plan would require substantial and sustained investment. Along with larger rivals, it is locked in a price war to stem the loss of shoppers to German discounters Aldi and Lidl and is also grappling with commodity-driven price deflation.

"It will be a long journey," said David Potts, the former Tesco (TSCO.L) executive who succeeded the sacked Dalton Philips as CEO in March.

Chairman Andy Higginson has previously talked about a five-year project.

Morrisons, based in Bradford, northern England, trails market leader Tesco, Wal-Mart's (WMT.N) Asda and Sainsbury's (SBRY.L) in annual sales. It has been particularly hard hit by the rise of the discounters, who are strong in its northern heartlands.

Having invested 181 million pounds in the first half of its financial year, mainly on price cuts, Potts said the company's full-year investment would top 300 million pounds.

Bernstein analyst Bruno Monteyne said it was still unclear how Morrisons could compete on price against the discounters and match the service of Sainsbury's (SBRY.L) and Tesco.

"Until we see the first signs of a retail proposition that has consumer appeal and that has been well costed, we do not anticipate margin improvements at the true underlying level," he said.

Shares in Morrisons initially fell up to 6 percent but recovered some ground to be down 2.7 percent by 1450 GMT.

Potts declined to comment on recent takeover speculation that has been prompted by Morrisons' relatively low valuation.

The company's problems have been compounded because it was late moving into the better-performing parts of the market, namely online shopping and convenience stores -- and has now decided to abandon the latter.

It said on Wednesday it was pulling out of the convenience store sector, having decided its stores were in the wrong place and not good enough to compete.

BLURRED IDENTITY

Potts said Morrisons' identity "has become blurred" in the eyes of shoppers but was confident he could restore it.

His focus was on improving the core supermarket estate of about 500 larger stores, although he said he planned to close 11 of these, threatening 900 jobs.

As well as reducing prices, Potts has so far cut management, increased shop floor staff by 5,000, cleaned up stores and improved product availability.

Trevor Green, head of UK equities at Aviva, one of Morrisons' top 100 investors, said Potts "is doing the right things" and that his strategic priorities "all make sense".

However, it will take time to reverse a sales decline.

Sales at stores open for over a year fell 2.4 percent in the second quarter, having been down 2.9 percent in the first quarter.

Potts said he was pleased with initial results from the firm's online venture with Ocado (OCDO.L), but would not be drawn on his commitment to the deal.

He said the firm's "Match & More" loyalty card, launched by Philips in October, was under review, telling reporters it was "not understood at all" by some customers. Some analysts expect it to be scrapped.

Morrisons' underlying profit before tax and restructuring costs fell 35 percent to 141 million pounds ($217 million) in the six months to August 2 on turnover down 5.1 percent to 8.1 billion pounds.

It said profit would be higher in the second half of 2015-16 than the first.

Before Thursday analysts' full-year forecasts ranged from 220 to 400 million pounds, with a consensus of 329 million pounds. Morrisons paid an interim dividend of 1.5 pence, down 63 percent. ($1 = 0.6496 pounds)

(Editing by Keith Weir)