By James Davey
LONDON (Reuters) - Britain's fourth-biggest grocer Wm Morrison is expected to report its lowest annual profit in five years on Thursday and could also detail plans to sell about 10 percent of its freehold property and return surplus cash to shareholders.
A second straight annual profit fall from Morrisons, the shares of which have fallen 19 percent over the past six months, will shine an unflattering spotlight on its late entry into online shopping and local convenience stores - the two fastest-growing retail market segments - as well as the intense competition from the rise of discounters Aldi and Lidl.
The company, which trails market leader Tesco, Wal-Mart's Asda and J Sainsbury in annual sales, is forecast by analysts to report profit before tax and one-off items of between 734 million pounds and 805 million pounds ($1.23-1.35 billion) for the year to February 2, according to a company poll.
An outcome in line with the consensus forecast of 783 million pounds would represent a 13 percent decline on the 901 million pounds it made in 2012/13.
That would serve to heighten investor expectations of some tangible reward from the review of the company's 9 billion pound property portfolio announced in September.
Morrisons emphasised that the bulk of its core estate - more than 90 percent of which is freehold - would remain under freehold ownership, but it did indicate that the review and reduced capital expenditure as it curtails superstore expansion could lead to the release of surplus capital to shareholders through a special dividend or share buyback.
Analysts at Barclays reckon that a sale and leaseback of property worth up to 1 billion pounds would be achievable.
"We would not be surprised if Morrisons chose to distribute only part of the proceeds of any sale to reduce balance-sheet pressure," Barclays analysts said, referring to the grocer's forecast for year-end net debt of about 2.7 billion pounds.
Morrisons has traditionally taken a conservative approach to its balance sheet compared with its peers. It is less leveraged than Tesco and Sainsbury's, which also have a significantly lower proportion of freehold property.
Analysts at Jefferies are assuming potential for a more modest 500 million pounds of property disposals.
However, a limited property sale will disappoint activist investors, including U.S. hedge fund Elliott Associates, who have called for Morrisons to hive off its real estate into a separate company. In addition to its retail stores, the Morrisons estate also includes distribution centres and manufacturing facilities.
A media report last month claimed that Morrisons' founding family, which owns about 9.5 percent of the group, had contacted buyout firms to gauge their interest in taking the business private. However, Ken Morrison, the son of the founder and the company's former chairman and chief executive, was reported to have said he knew nothing about a potential buyout.
Morrisons warned in January that annual profit would be towards the bottom of the range of market forecasts at the time, having seen underlying Christmas sales fall well short of expectations, slumping 5.6 percent in the six weeks to January 5.
The grocer was by far the worst performer among Britain's so-called Big Four over Christmas, and monthly industry data has shown that it has continued to struggle.
To address its structural shortcomings Morrisons agreed in May to invest more than 200 million pounds in a 25-year deal with online grocer Ocado, which enabled it to start home deliveries in January.
It is also conducting an aggressive expansion of its chain of "M local" convenience stores, with a target of 200 by the end of the year, while investing heavily in technology and systems and upgrading its 500-plus supermarkets.
Analysts also expect Morrisons to flag an investment in lower prices in response to the traction gained by the upstart discounters. Tesco, Asda and the Co-op have all announced price-cutting initiatives in recent weeks.
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(Editing by David Goodman)