The latest set of sales indicators from the UK high street would no doubt have made for shocking reading over at retail colossus Marks & Spencer (LSE: MKS).
British retail sales sank 0.3% in January, according to the Office for National Statistics, missing broker forecasts by a large margin. And the body noted that in the three months to January, sales dropped 0.4%, the first such fall since December 2013.
ONS economist Kate Davies said that “increased prices in fuel and food are significant factors in this slowdown,” and this trend looks set to continue in 2017 and potentially beyond, casting a long shadow over sales prospects for the likes of M&S.
The company is already facing extreme sales pressures as its fashion lines are still failing to fire. And it could see sales at its Food division — currently the only ray of light at the firm — come under pressure too, should inflation dent demand for its high-priced goodies.
And with it also reining-in its international ops, I reckon the retailer is in danger of prolonged earnings trouble. So I thus believe investors should give the firm short shrift, in spite of an attractive forward P/E ratio of 11.2 times.
Takeover trouble?
I am also far from bullish concerning the long-term outlook for Tesco (LSE: TSCO) even if sales data has picked up in recent months.
The Cheshunt chain has reinvigorated its till performance by continuing to cut costs and investing in customer service. But concerns remain as to whether these measures are a mere sticking plaster on a titanic wound as both new and established rivals step up their expansion strategies on the street and in cyberspace.
Glass-half-full investors will be hopeful that the £3.7bn takeover of Booker Group (LSE: BOK) will invigorate Tesco’s profits performance in the years ahead.
But while Tesco plans to widen its scope to encompass the dining needs of Britons eating out and at home, concerns are rising over whether the tie-up will bring the desired sales and cost benefits for Britain’s biggest grocer. Indeed, Tesco senior independent director Richard Cousins is said to have relinquished his post in protest at the deal.
Besides, many Tesco investors will fear that chief executive Dave Lewis’s gaze will be drawn away from maintaining the recent recovery in its supermarkets. And with good reason — after all, it has previously been caught over-stretching itself with disastrous moves into the US and Japan, just as Aldi and Lidl taking bites from its core UK customer base.
Sure, the City expects earnings at Tesco to rebound strongly from the current year. But a prospective P/E ratio of 26 times — soaring above the forward FTSE 100 average of 15 times — is not indicative of the massive structural problems facing the business that could derail any sustained recovery.
And this elevated reading leaves Tesco’s share price in danger of a painful retracement should the recent sales renaissance at its stores prove to be another false dawn.
