Tesco finds Christmas sweet spot but shares sour
Tesco’s festive and quarterly trading, like that of its rival outperformer Morrisons, hit the sweet spot where buoyant consumer confidence and fine-tuned pricing meet.
Tesco’s festive and quarterly trading, like that of its rival outperformer Morrisons, hit the sweet spot where buoyant consumer confidence and fine-tuned pricing meet.
Tesco’s festive and quarterly trading, like that of its rival outperformer Morrisons, hit the sweet spot where buoyant consumer confidence and fine-tuned pricing meet. This enabled the group to confirm that it grew market share for the first time since 2011. It’s a significant victory against incursions by discounters Aldi and Lidl, which have been aggressively appropriating large chunks of Britain’s grocery purse for around three years. If Tesco can sustain this current quarterly pace of low-single-digit percentage underlying sales growth—we are cautiously confident of its chances—it will be on track to meet a retail operating profit growth target of at least 60% earlier than the 2020 date foreseen by CEO Dave Lewis. That would point to continued recovery of Tesco’s shares. However, whilst Q3 sales were robust and, to quote Lewis this morning, “ever so slightly more” than £1.2bn operating profit is now as good as in the bag, after a near-40% advance in 2016, nearby catalysts for more stock price gains are being judged as too flimsy by investors.
Even so, we expect the shares to consolidate rather than deteriorate significantly from here, and see another respectable double-digit rise by the stock this year as feasible.
Tesco shares were also not helped by further cautious comments by its CEO this morning, such as that “no change in pattern” of UK consumer spending had been identified so far. That might be sticking strictly with the facts, but certainly leaves out several hopeful signs seen this week and late last year in the wider consumption and retail picture.
By contrast, shares of troubled Marks & Spencer rose as much as 3% early doors on Thursday after it said it beat forecasts for Christmas trading. The group also saw its own milestone: the first quarterly rise in underlying clothing and home ware sales for two years. It’s significant however that the group itself did not spotlight the achievement in its trading statement, instead noting that “c.1.5%” of a 3.1% gross sales rise was “was due to the shift in reporting period.”
Unwillingness to crow, yet, suggests that CEO Steve Rowe is wary about how easy it will be to repeat the feat at a division where sales persistently sank despite millions of pounds of investment and revamps. He is “absolutely clear”, he said this morning, that there’s lots more to do.
On the food side, Marks remains on firmer ground, posting 0.6% like-for-like growth in the 13 weeks to the end of December, continuing a virtually unbroken run that weathered the grocery sector downturn with similar-sized fractional growth per quarter, but growth nonetheless.
The challenge for the group’s food business now is to accelerate, particularly as the UK enters an inflationary environment which will challenge all grocers anew, but also one where rivals like Tesco and Morrisons—at least judging by their most recent performance—have found a formula that wins respectable sales progress.
Either way, M&S’s likeliest growth driver remains Clothing & Home, a division where it will be the most difficult to protect shoppers from the rise in input prices, as has been discovered by Next and others already.