With the referendum dominating news headlines around the world, today represents an excellent opportunity for companies to release less-than-inspiring trading updates. With this in mind, let’s see whether that holds true for the latest set of figures from the UK’s biggest retailer.
Signs of recovery
The fact that the UK goes to the polls to make one of the biggest decisions for a generation is perhaps unfortunate for Tesco (LSE: TSCO) as today’s update contained some fairly encouraging figures. Group like-for-like sales were up by 0.9%. Sales in the UK rose by 0.3% and international sales were 3% higher, representing a second quarter of growth for the FTSE 100 giant. The new fresh food brands launched in March have been positively received by customers (with satisfaction scores for quality and taste above 90%) and are performing in line with expectations. The disposal of non-core assets continues with the announcement that the £14bn cap is to sell the coffee chain Harris + Hoole to Caffè Nero, adding to a list of recently agreed sales that also includes Dobbies Garden Centres and the Giraffe restaurant chain. This further emphasises Tesco’s desire to concentrate on improving its core UK business.
While reflecting that the grocery market remains challenging due to sustained deflation, CEO Dave Lewis’s tone was clearly upbeat: “By growing volumes, transforming the way we work together with our suppliers, and further optimising our store operating model we are rebuilding profitability in a sustainable way.“
So the update sends a message to the market that Lewis’s strategy appears to be bearing fruit. While this kind of progress may be too slow for some, I’m satisfied the company is mending its ways and returning to what it does best, selling food. A dividend would be appreciated but payouts are unlikely to be reinstated until 2017 at the earliest.
And Tesco’s rivals?
Like Tesco, Sainsbury (LSE: SBRY) recently issued a trading update. Here, like-for-like retail sales were down (0.8%) although total group sales were up 0.3%. While this performance isn’t derisory, it’s not quite as good as that achieved by Dave Lewis and his colleagues. Moreover, the planned acquisition of Home Retail arguably raises more questions than it answers. At a time when UK supermarkets should be simplifying their operations, Sainsbury seems to be doing the opposite.
Nevertheless, shares in the £5bn cap currently trade on a P/E of just over 11 and come with a dividend yield of 4.9%. This makes it the cheapest of the three listed UK supermarkets and also the one offering the highest payout.
The third piece of the listed UK supermarket pie is, of course, Morrisons (LSE: MRW). Similar to Tesco, it also achieved a second quarter of growth after sales grew by 0.7% in the three months to 1 May (this figure was boosted by sales from its online store). It has also been attempting to simplify operations by disposing of its convenience store business and closing unprofitable stores. Analysts have pencilled-in earnings growth of around 12% for 2017 and 11% for 2018 for the Bradford-based company. Although less than that offered by Sainsbury, a yield of 2.65% looks sensible given current trading conditions.
