Wm Morrisons Supermarkets PLC (LON:MRW) and J Sainsbury PLC (LON:SBRY) have followed the market leader Tesco in announcing that they are also waiving the offer of business rates relief, though other retailers such said they would not be following suit.
Morrisons revealed its decision yesterday evening, and Sainsbury’s put out a statement confirming it was doing the same this morning, a day after Tesco’s surprise announcement, though it is apparently keeping GBP40m of business rates relief for its Argos stores, as these were deemed non-essential during the national coronavirus lockdowns.
Bradford-based Morrisons, which said it had been “considering” the issue for some time but was waiting for the costs and duration of the pandemic to become more clear, also took the opportunity to declare a special dividend.
Holborn-headquartered Sainsbury’s, which declared a special dividend alongside last month’s interim results, said the second national lockdown in England was the decider for its board.
Morrisons pledged to pay its full GBP274mln of business rates, of which GBP230mln relates to the current financial year. This is versus total expected costs of GBP270mln from the pandemic, which is GBP40mln more than its previously guidance.
As a result, management said full-year underlying profit before tax and exceptional items is still expected to be in line with current expectations.
Reflecting its strong balance sheet and underlying cash flow, supported by our freehold property portfolio and pension surplus, Morrisons proposed a special dividend of 4p per share to shareholders, which it said relates to the previously deferred final payment for the past financial year.
For Sainsbury’s, the amount of rates relief to be forgone is GBP450mln, of which GBP410mln relates to the current year. It says direct Covid costs were GBP290mln in the first half of the year.
Taking the repayment into account, Sainsbury’s said if including business rates payments within underlying profit before tax, it now expect to make at least GBP270mln for the year to end March, 2021. For 2022 it still expects underlying pre-tax profits to exceed the GBP586mln from last year.
The Sainsbury’s board said if the business delivers profits and cash generation in line or above current expectations, it “believes that shareholders should not bear the full short-term financial impact this year of the business making the right decisions for customers and colleagues through the COVID-19 pandemic” so promised to prioritise payment of dividends to shareholders over net debt reduction.
This will mean reaching its target of at least GBP750mln of net debt reduction in the three years to March 2022 has been pushed back by a year.
Aldi, the UK’s fifth biggest supermarket chain, said it is also returning its GBP100mln-plus of business rates relief will be paid back.
Giles Hurley, chief executive of the German discounter’s UK arm, said: “Thanks to our amazing colleagues, we have been able to remain open during lockdowns and despite the increased costs we have incurred during the pandemic, we believe returning the full value of our business rates relief is the right decision to help support the nation.”
Marks & Spencer, which claimed business rates relief of GBP83.7mln in its first half to September 26, said yesterday that it was not going to return the funds.
Its clothing stores were deemed non-essential and were shut during the national lockdowns.
“We are very grateful for the much-needed support government has provided to businesses impacted by the pandemic – including ours,” an M&S spokesperson told Reuters.
“It has enabled us to support our colleagues and our suppliers, whilst continuing to serve our customers in what have been incredibly challenging circumstances.”
With Sainsbury’s also keeping the rates relief for its Argos stores, analyst Nick Bubb said this was a “possible route” for mixed food-and-non-food retailers like John Lewis to follow.
Shares in Sainsbury, which had fallen 3% the previous day, were back up 3% to 216p, while Morrisons shares fell for a second day, down 1% to 176.9p.
As with Tesco’s decision, analysts at Shore Capital, house broker to Morrisons, said they were surprised.
“We know, given the reaction of investors to us today, that many shareholder will be disappointed to put it politely. Indeed, there is a question emerging on many investors’ minds in terms to where shareholders sit as stakeholders to plc boards.
“No doubt after this decision, shareholders will be reflecting their views to the boards of Morrison and Tesco, noting that some will also welcome the decision from a reputational standpoint.”
UBS said: “Although the near term net debt target has been pushed out, trading is evidently better than expected and the dividend is protected.
“Targets have been held for next year as well as longer term FCF and so fundamentally little has changed. Given share price moves yesterday after TSCO’s announcement we would not expect such a strong reaction and we see any weakness as opportunity to buy.”