Wm Morrison, the UK's fourth-biggest grocer, beat third-quarter sales forecasts yesterday and said it had agreed to buy 38 stores from the Co-operative Group for £223 million.
Morrison, which serves 10 million Britons a week from about 375 stores, said sales at shops open at least a year, excluding fuel, rose 8.1 per cent in the 13 weeks to November 2, topping analysts' average forecast of 7.1 per cent in a Reuters poll.
Sales were boosted by strong demand for the group's innovative promotions, with around 250,000 shoppers buying its Sunday lunch for four people for £4 and 230,000 switching to its Indian meal deal from restaurants and take-aways.
Britons are curbing spending at a time of sliding house prices, rising unemployment and fears of recession and switching to grocers, like Morrison, associated with cheaper prices.
Morrison's strong performance contrasts with the two per cent rise in underlying third-quarter UK sales reported by industry leader Tesco on Tuesday, although that figure was held back by customers switching to Tesco's discount brands range.
Morrison, also one of Britain's top-five food manufacturers, said trading was set to remain tough and it would welcome a cut in interest rates from the Bank of England.
"We all know how tough it is for the consumer," finance director Richard Pennycook told reporters. "Any incremental steps that can help ease that situation must be positive."
Merrill Lynch analysts said Morrison's performance was impressive, but already factored into the group's shares, which trade at 15.1 times forecast earnings, above industry leader Tesco on 12.2 times, according to Reuters data.
"Ebbing inflation, a darker backdrop and Morrison's premium PE (price-to-earnings) rating mean we stay 'underperform,' but are less negative," they wrote in a research note.
The deal with the Co-op, which has been required by regulators to sell some shops after its purchase of Somerfield earlier this year, was part of a package of £403 million of new investments which Morrison said would lead it to suspend its share buyback programme for this financial year.
The firm said it had spent £145.4 million buying back shares out of a planned £1 billion over two years.
In the absence of other investment opportunities, Pennycook said it planned to buy back the remaining approximate £500 million of the £1 billion cash surplus from shareholders in the next financial year. He added that Morrison was unlikely to be interested in buying a large chunk of stores from sweets-to-DVDs chain Woolworths, which went into administration last week.
The deal with the Co-op would lead to £98 million of acquisition, integration and refurbishment costs, Morrison said.
The new stores would boost Morrison's portfolio of about 150 smaller shops and should boost earnings from 2010-11, it added. Morrison also said it had agreed to buy the freehold of a partially built distribution centre in Kent, southeast England, from the developer for £82 million.
Morrison, said it had attracted around 700,000 extra shoppers a week over the past year from across its rivals.
Pennycook said the firm was not running many more promotions than at this time last year, but that it was trying to be innovative, with deals such as its Christmas voucher, which offers shoppers £20 off if they spend more than £40 in four of the five weeks running up to Christmas.
Morrison said its financial expectations for the year ending in January remained unchanged. Analysts on average expect the firm to make a profit before tax and one-off items of £633 million, according to a poll of 19 by Reuters Estimates.