By Chris Bailey of Financial Orbit | Thursday 12 January 2017
Disclosure: I own shares in one or more of the stocks mentioned. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.
After being outed by Tom Winnifrith as a non-adherent to the Star Wars doctrine, I turn my thoughts to matters in our galaxy (not far away)…and the bevy of trading updates from supermarkets this week.
The week started with a boost akin to the hyperdrive on the Millennium Falcon as Morrisons (MRW) had its ‘strongest performance for seven years’ with a Christmas period like-for-like sales growth of 2.9% boosted by its superior product Best range which allowed it to say that profits would be ahead of hopes.
Well done turnaround CEO Morrison Dave…your back-to-basics strategy has worked out pretty well…and the shares (150p a year ago) are pushing 240p as I write. Back in the day it used to be that 300p was a real historic barrier for Morrison shares. I would be a holder here awaiting a full set of numbers and next step strategy chat.
Then came Sainsbury’s (SBRY) on Wednesday and even though its headline like-for-like sales were barely positive the market got the horn with its observation that the newly acquired Argos had seen like-for-like sales growth of 4%. Trading-wise whilst acknowledging a 50% rise in sales of Taste the Difference party sales and just how cheaply it was selling turkey for…Sainsbury’s did not push up its profit numbers and was generally a little bit more downbeat about future prospects, with observations including:
‘The market remains very competitive and the impact of the devaluation of sterling remains uncertain’
Sainsbury’s shares do not interest me here.
Perhaps it is because it is not run by someone called Dave…because Tesco (TSCO) today in a Morrisons-esque manner banged on about an eighth successive positive like-for-like quarter as it continues its own corporate renaissance even if recent like-for-like sales growth was impacted by changes to the Clubcard offering.
Tesco shares are down 2% odd today though and are currently a few pence above the 200p level. There are two reasons for this. First the well-received Morrisons and Argos-pumped Sainsbury’s numbers had already boosted its shares earlier in the week. Second, Tesco also mused about the next phase of supermarkets wars in the UK with the observation:
‘We have worked hard throughout the period - in collaboration with our supplier partners - to minimise the impact on our customers of the inflationary pressures that have started to emerge in the market. As a result, while deflation has eased, the price of a typical basket remains nearly 7% cheaper than in September 2014. We will continue to do all that we can to ensure that we offer our customers the best possible prices’.
There is a serious two-way pull going on at the moment. Inflation is up in the world and food inflation is clearly shifting north as highlighted by some numbers today out of the United Nations’ Food and Agricultural Organisation Index which showed a rise of 12% year-on-year. Unsurprisingly the suppliers – including Unilever (ULVR) and perennial dog Premier Foods (PFD) – are agitating for increases but, as noted above by Tesco, the key debate is just how much is passed onto me and you.
And this, of course, is the central message of the Christmas trading updates. Best and Taste the Difference sales success will be harder to replicate outside of a holiday period and too much general price compression threatens to play again into the hands of the Aldi and Lidl’s of this world - against which the big names struggle to compete on price, but are increasingly doing ok on range, convenience and online / delivery capabilities. And once you talk about prices…you end up talking about profits.
It is clearly still not an easy backdrop and memories of good Christmas trading will fade quickly into 2017. I would continue holding onto Morrison and Tesco shares here on the basis they are delivering, but what I really want to hear come the spring is the strategy they will employ in 2017-18 to keep both the tills ringing and the bean counters happy. Sales are vanity and profits/cash flow are sanity as always.
Perhaps we should ask Yoda for a view (although my cursory look at his film appearances suggest to me he would prefer Waitrose – and a free coffee ‘natch).
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