The Motley Fool

Is the worst over for Tesco plc, J Sainsbury plc and WM Morrison Supermarkets plc?

You could be forgiven for thinking that the worst is over for UK supermarkets. Since the beginning of the year, shares in Tesco (LSE: TSCO), Sainsbury’s (LSE: SBRY) and Morrisons (LSE: MRW) have traded in a relatively tight range, and trading statements from these three retailers have struck a cautiously upbeat tone.

But are things really set to get better for this trio of grocery giants?

Claim your FREE copy of The Motley Fool’s Bear Market Survival Guide.

Global stock markets may be reeling from the coronavirus, but you don’t have to face this down market alone. Help yourself to a FREE copy of The Motley Fool’s Bear Market Survival Guide and discover the five steps you can take right now to try and bolster your portfolio… including how you can aim to turn today’s market uncertainty to your advantage. Click here to claim your FREE copy now!

Is the worst over?

At first glance, it looks as if it is. Kantar Worldpanel said yesterday that sales at Tesco fell 0.7% during the 12 weeks to 17 July. The retailer’s market share came in at 28.3% of the market down by only 0.2%, the slowest rate of market share loss since March 2014. Morrisons’ sales for the period declined by 1.8%, a figure that still reflects a wave of store disposals last year and Sainsbury’s saw sales fall 1.1%, which according to Kantar, reflected a move to phase out multi-buy offers.

Tesco, Sainsbury’s and Morrisons’ sales are still falling, but at a much slower rate than they were at the peak of the sector’s disruption. Indeed, in the 12 weeks to 9 November 2014, Tesco’s sales fell by 3.7%, Morrisons’ by 3.3%, and Sainsbury’s sales declined by 2.5%.

The other side of the story 

The above figures only tell half of the story. Sales declines at these retailers have slowed but no-frills rivals Aldi and Lidl continue to expand and take market share. For the 12 weeks to 17 July this year, Aldi and Lidl reported sales growth of 11% and 12.5% respectively, driven by store openings. And these chains have a wave of new openings planned in the weeks and months ahead as they try to grab a bigger share of the UK retail market.

As a result, Tesco, Sainsbury’s and Morrisons will have to keep on their toes if they want to continue on their current trajectory of steadily improving sales figures. What’s more, these traditional retailers are facing a new threat in the form of Amazon Fresh, the online, low-cost grocery retailer owned by internet giant Amazon.

The bottom line 

All in all then, it may look as if the worst could be over for Tesco, Sainsbury’s and Morrisons but these retailers aren’t out of the woods just yet. The retail landscape has changed significantly over the past few years and these three are still adapting to the new landscape. It will take several years before the full benefits of restructuring, store closures and new loyalty programmes show through in their earnings. As a result, investors may be facing a long wait before the sector becomes attractive again.

Furthermore, current valuations don’t adequately reflect the uncertainty facing the sector. Shares in Tesco currently trade at a forward P/E of 57.9. Shares in Sainsbury’s trade at a 2017 P/E of 11.1 and shares in Morrisons trade as a forward P/E of 17.5.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US $12.3 TRILLION out of thin air…

And if you click here, we’ll show you something that could be key to unlocking 5G’s full potential...

It’s just ONE innovation from a little-known US company that has quietly spent years preparing for this exact moment…

But you need to get in before the crowd catches onto this ‘sleeping giant’.

Click here to learn more.

Rupert Hargreaves 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.