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Morrisons misses out on online and convenience sales

Shoppers walk through the entrance of a Morrisons supermarket, in west London January 22, 2009. REUTERS/Toby Melville

LONDON (Reuters) - Wm Morrison Supermarkets (LSE:MRW), Britain's fourth-biggest grocer, reported a 10 percent drop in first-half profits on Thursday, hit by its late entry into the online and convenience store markets.

Morrisons has seen profits and market share dented by its lack of exposure to online grocery and local convenience store channels which are growing in Britain at about 16 percent and 20 percent a year respectively.

However, in May the firm agreed to invest over 200 million pounds in a 25-year deal with online grocer Ocado (LSE:OCDO) that will see it start home deliveries by January 2014.

Morrisons is also aggressively opening "M local" convenience stores, with a target of 100 by the end of the year and 200 by the end of 2014 and investing heavily in technology and systems.

The company, which trails Tesco (LSE:TSCO), Wal-Mart's (NYS:WMT) Asda and J Sainsbury (LSE:SBRY) in annual sales, said it made an underlying pre-tax profit of 401 million pounds ($634 million) in the six months to August 4.

That compares with the average of analysts' forecasts of 410 million pounds, according to a company poll, and 445 million pounds made in the same period last year.

Turnover was flat at 8.9 billion pounds, while sales at stores open over a year, excluding fuel and VAT sales tax, fell 1.6 percent, having fallen 1.8 percent in the first quarter.

However, the company raised the interim dividend by 10 percent to 3.84 pence a share and though it is not budgeting for a significant change to Britain's economic outlook in the near future said it does expect an improvement in its sales performance in the second half, with a full year outcome "broadly in line with previous expectations."

With future growth expected to be driven by online and convenience channels the firm has reduced its commitment to new supermarket space, limiting expansion to around 350,000 square feet annually from the 2014-15 year - slightly less than half of the average rate of growth in its supermarket space over the last five years.

This means capital expenditure will reduce significantly in 2014-15 to around 850 million pounds from an expected 1.2 billion pounds in 2013-14. Thereafter, Morrisons expects an annual rate of about 650 million pounds.

Shares in Morrisons, flat over the last year, were up 3.7 percent at 308 pence at 0732 GMT, valuing the business at 7.2 billion pounds. ($1=0.6324 British pounds)

(Reporting by James Davey; Editing by Greg Mahlich)