Have The Big Grocers Finally Turned The Corner? Tesco Plc, J Sainsbury Plc And WM Morrison Supermarkets Plc?

After reporting positive news for the Christmas period, have the traditional big grocers Tesco (LSE: TSCO), J Sainsbury (LSE: SBRY) and WM Morrison Supermarkets (LSE: MRW) finally begun to return to growth?

Times still tough

Tesco booked an increase in domestic like-for-like sales of 1.3% for the six-week Christmas period, although overall sales still fell for the quarter as a whole. With the share price up 13% since the New Year, investors may be beginning to feel as if the worst is over for Tesco. However, the company’s route back to sustained and significant profitability remains murky at best. Operating margins in the UK for the past half year fell to 0.77% and supermarket price wars don’t appear to be ending any time soon. While the sale of Korean operations will bring net debt and pension deficits below £9bn, Tesco is quickly running out of major assets to dispose of to pay this bill and will increasingly need to divert free cash flow to this purpose. 

Turnaround strategy?

Sainsbury’s final three months of 2015 saw total retail sales growth of 0.8%. Although like-for-like sales fell, decreases were less severe than in preceding quarters. The two main bright spots for Sainsbury’s remained its higher-margin own-brand goods and sales of general merchandise such as clothing. The 5% quarterly growth in general merchandise sales goes some way to illuminate the reason for the mooted takeover of Argos parent Home Retail Group. Sainsbury’s management believes it can close many of Argos’s current locations, relocate them inside large Sainsbury’s, and thereby drive more traffic to both. However, Amazon is squeezing Argos just as much as low-cost rivals Aldi and Lidl are squeezing Sainsbury’s, and I fail to see how a costly combination of the two struggling retailers is going to turn things around.

Margin misery

Morrison’s 0.2% increase in like-for-like sales over the Christmas period marked the first sales growth the grocer had seen in four years. Focusing assets on profitable stores and increasing online sales is a good plan, but operating margins have fallen to 2% and management forecasts this trend will continue. One positive for investors is that predicted pre-tax profits of around £250m provide a solid two times cover of the 3.5% yielding dividend.

While each of Tesco, Sainsbury’s and Morrisons posted positive news of some type over the Christmas period, the long-term outlook for the sector remains bleak. Price-focused Aldi and Lidl continued to gain market share over the past quarter and don’t look set to stop any time soon. Asda parent Walmart’s decision to earmark a further £500m investment for discounts to retain market share signals that price wars will also continue. Lower margins and decreased market share mean that I wouldn’t view any of these three grocers as a viable long-term investment based on a single piece of good news over the Christmas period.

The growth prospects of these stodgy grocers certainly look to be quite low throughout the coming years. For investors seeking a share with much higher potential, the Motley Fool has released this free report on 1 Top Small Cap with a very bright future ahead of it.

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