In 2014, more than a quarter of the companies listed in the FTSE 100 issued profit warnings, according to a new study by Ernst & Young (E&Y). Despite the UK’s economic revival, 27 companies in the FTSE 100 had to alert investors that they were likely to miss earnings targets. Between them, the 27 issued 38 profit warnings — far more than the 26 seen in 2008 at the peak of the financial crisis.
Three of those FTSE 100 companies that issued profit warnings throughout 2014 were part of the “Big Four” UK supermarket collective — Tesco (LSE: TSCO), Sainsbury’s (LSE: SBRYS), Morrisons (LSE: MRW). In this article, I will discuss these profit warnings, why they were issued and whether it is “the point of no return” for Tesco, Sainsbury’s and Morrisons in 2015.
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One of the UK’s largest supermarkets seemed to be “King of the Profit Warnings” last year, delivering five in total, the last one being on 9 December when the group said its profits will be substantially lower than expected. The group’s chief executive, Dave Lewis, said he expected trading profit for the year ending February 2015 would be no more than £1.4bn.
The news sent its shares tumbling to a 14-year low of 156p. Tesco’s share price has since recovered and is trading around the 229p mark. However, you cannot ignore the fact that last year Tesco’s shares fell 44%, compared to a 2% hike in the FTSE 100 alone.
Share price aside, the inherent problem with Tesco is that competition from “discounters” Lidl and Aldi is only going to increase this year, not lessen. A number of high-profile senior executives have left the supermarket, and a criminal investigation into accounting irregularities is ongoing. Although Tesco’s CEO has vowed to improve its customer service and cut the price of 1,000 of its groceries, it still has a long way to go.
Back in October last year, Sainsbury’s cut its annual sales forecast and said it would review its dividend as part of a wider strategic business review. Sainsbury’s said it now expected second-half sales at stores open over a year to fall by a similar amount to the 2.1% fall recorded in the first-half.
No longer under the helm of successful CEO Justin King, this “Big Four” supermarket is suffering and definitely under pressure from discount supermarkets like its rivals. CEO Mike Coupe, who succeeded King in July last year, told the media that market conditions were the most challenging he had experienced in his 30-year career in retail. At the beginning of January, its third-quarter trading update saw some signs of improvement, but its like-for-like sales are still in negative territory.
And finally, onto Morrisons. The supermarket seems to be trailing behind its rival Tesco having ‘only’ issued two profit warnings last year. It was a diastrous year for Morrisons, and it hasn’t got any better in 2015, with another profit warning announcement earlier this month and the sacking of chief executive Dalton Philips after five years — he is due to leave the company in March.
On the upside, Morrisons does have a turnaround strategy in place, and has embarked on a three-year £1bn investment programme, while it has now also ventured online. Investors could either be pleased with this investment programme or frustrated, as they may view it as being “too little too late” due to the discounters snapping at Morrisons’ heels. Alternatively, investors could take a holistic approach and enjoy Morrisons’ dividend yield of 6.9%.