It doesn’t look like the FTSE 100‘s supermarkets have had a particularly good Christmas, even if economic optimism might have brightened a bit as a result of the election.
Morrisons (LSE: MRW) gave us a trading update on Tuesday for the 22 weeks to 5 January, revealing a drop in like-for-like sales (excluding fuel) of 1.7%. The company told us: “Throughout the period, trading conditions remained challenging and the customer uncertainty of the last year was sustained.“
What I take from it generally is that it seems to have been a year of tight control of costs and offloading underperforming stores, with four closed and four new ones opening. The company also opened 25 new Fresh Look stores, and the new brand seems to be doing pretty well.
Competition
That’s positive, but we see a big contrast when we look at what key competitors Lidl and Aldi are doing. Lidl plans to open another 230 stores in the UK over the next three years and take its total to 1,000 by 2023. Aldi, meanwhile, saw its sales in the four weeks to Christmas climb by 7.9%, to top £1bn for the first time, and is aiming to open more than 300 new stores by 2025 for a total of 1,200.
At Sainsbury (LSE: SBRY), meanwhile, sales for the 15 weeks to 4 January actually grew by 0.4%, and while it’s not negative, it was only made possible by a 5% rise in total online sales. Retail sales (both total and like-for-like) declined by 0.7% (excluding fuel).
Chief executive Mike Coupe said: “We gave our customers a great combination of quality food at good prices this Christmas and we delivered a standout performance operationally.”
I’m not entirely sure I’d describe what I’ve seen as standout, and the markets didn’t seem over-enthusiastic either, with the share price dropping a couple of percent during Wednesday morning.
Price-cutting
One of Sainsbury’s key targets was to be more competitive on price, which is pretty much unavoidable in these days of super-low prices from the interlopers. But it does tend to show that Sainsbury’s previous positioning as a bit upmarket is no longer viable, and I’m really not seeing any significant differentiation these days.
While this update isn’t too bad (if perhaps not the triumph that Coupe seems to see), flat sales coupled with squeezed margins are leading analysts to forecast a 13% fall in EPS for the year to March.
Since a peak of over 290p back in February 2019, Sainsbury shares have lost 22% of their value. That does include the big slump after the proposed Asda merger was blocked, and they’ve been creeping back up again since August’s low. Prospective P/E multiples of around 11.5, with dividend yields above 4.5% might look attractive, but I’m not tempted.
Shares down
The Morrisons share price is down too, by a very close 21% from a February peak. But there we’re looking at a significantly higher forward P/E of 15, dropping to 14 for next year, as there’s a bit of earnings growth expected. Dividend yields are lower at 3.5% to 3.7%.
Again, I don’t see a convincing reason to buy. Both companies are struggling to keep up with the competition in an increasingly tough market, and the supermarket business just doesn’t offer an attractive proposition to me.
