Wages Are Growing Again But Can Tesco PLC, J Sainsbury plc & WM Morrison Supermarkets PLC Cash In?

Wages and retail sales are rising, but Harvey Jones questions whether Tesco PLC (LON: TSCO), J Sainsbury plc (LON: SBRY) and WM Morrison Supermarkets plc (LON: MRW) will feel the benefit

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Investors who still want to believe in the big supermarkets have to cling onto any piece of positive news these days.

A few early cost-cutting decisions by new boss Dave Lewis was all it took to convince them to pile back into Tesco (LSE: TSCO).

A 12-week spell when J Sainsbury (LSE: SBRY) didn’t lose market share had investors purring. And when WM Morrison Supermarkets (LSE: MRW) posted a 0.2% rise in sales, it almost broke the internet.

Yet this week’s news that UK wages, including bonuses, has risen 2.7% in the last year brought only brief respite to the embattled sector.

I would have thought that was a real plus, putting real money in people’s pockets, given that inflation is just 0.1%.

Weren’t the big supermarkets supposed to be losing ground to Aldi and Lidl because cash-strapped customers were desperate for discounts?

Food Fight

The news was followed by new official figures on Thursday showing retail sales up a better-than-expected 4.6% in May, suggesting consumers really are feeling more buoyant.

Food sales rose at a slower pace, 2.7%, but that was still far better than April’s figure, a 0.1% drop.

Sales grew by both value and volume, even if this was partly driven by alcohol promotions.

Aldi Wins

The underlying problem is that even if sales do rise, margins are still being squeezed by the ongoing price war.

People are still watching the pound in their pockets, even if they have more of them, in real terms.

Plus rivals Aldi and Lidl are still walking on cheap bottled water, with Which? naming Aldi named supermarket of the year on Wednesday.

Credit Crunch

Investors in the big supermarkets are constantly braced for bad news and duly received it on Wednesday when Credit Suisse posted a negative note on Tesco and Sainsbury’s, relegating them to “underperform”

It lowered Tesco’s price target to 169p (against today’s 209p) and was similarly miserly towards Sainsbury’s (219p against today’s 261p). Morrisons was deemed neutral with the target equal to today’s 176p share price.

The broker said it saw few opportunities within a sector that has historically misallocated capital, faces extreme competitive pressures and operates in a low growth environment.

Margin Call

The numbers won’t necessarily improve even if wages and sales continue on their upward path, because the sharp fall in margins will prove difficult to unwind.

I wouldn’t have guessed that Morrisons would look like the best prospect of the three FTSE 100-listed supermarkets right now. The rest, however, is sadly predictable.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Harvey Jones has no position in any shares mentioned. The Motley Fool UK owns shares of Tesco. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »