Wm Morrison Supermarkets plc’s credit prole is stronger than Tesco plc, although both UK grocery retailers remain under pressure. We believe that Wm Morrison has a slightly better risk prole than Tesco, supported by its lower leverage, lower exposure to very large stores and decisive strategy of narrowing
the price gap with the discounters. We downgraded Tesco to Baa3 because we expect continued weak operating performance. e rating remains under review for downgrade because Tesco’s strategy to turn the business around remains unclear,
it has not provided full-year prot guidance and an external investigation into accounting errors could add further negative pressure.
Business pro advantage Tesco. Tesco is more geographically diversied, has a much larger UK market share and a bigger presence in the higher-growth online and convenience stores sectors than Morrison.
Store estate: advantage Morrison. Around 90% of Morrison’s trading properties are freehold and its lease obligations are relatively low, providing a large degree
of operational and nancial exibility. Tesco has a much higher exposure to the troubled large, out-of-town hypermarket stores and a large proportion of leasehold properties.
Turnaround strategy: advantage Morrison. We believe Morrison has taken more decisive action than Tesco to date in tackling the rising market share of the discounters. Tesco’s new management team has not concluded its strategic review and this has already delayed its response to the rising challenges of the market’s structural changes.
Financial policy: draw. Morrison’s dividend policy remains very shareholder friendly and is only sustainable if its protability improves in scal 2016 but
is balanced by the commitment to an above 80% freehold position. Tesco announced it would cut its interim dividend by 75% in August 2014 but further details regarding its new business and nancial strategy are necessary to assess its commitment to retaining an investment-grade rating.