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UK Supermarket Shares Soar Before Uncertainty Seeps

Robust growth in consumer spending has been one of the main factors sustaining Britain’s economy since the Brexit vote last June.Robust growth in consumer spending has been one of the main factors sustaining Britain’s economy since the Brexit vote last June.

Britain’s three quoted major supermarkets are expected to report this week that they enjoyed solid Christmas trading, though investor concern about a potential squeeze on consumer spending in 2017 means the focus is on their outlooks.

Shares in market leader Tesco and Morrisons, the UK’s fourth biggest grocer, soared 38% and 55% respectively in 2016, reflecting a recovery in trading, Reuters reported.

That coincided with a slowdown in sales growth at German discounters Aldi ALDIEI.UL, which will update on Christmas on Jan. 9, and Lidl LIDUK.UL as Britain’s traditional supermarkets cut their prices, and continued problems at sector laggard Asda, the No. 3 player.

The share price of No. 2 Sainsbury’s was held back by uncertainty over the merits of its 1.1 billion pounds ($1.36 billion) takeover of household goods retailer Argos.

Robust growth in consumer spending has been one of the main factors sustaining Britain’s economy since last June’s vote to leave the European Union. However, retailers fear a reduction in spending as inflation begins to erode real earnings growth in 2017.

Sterling’s devaluation since the Brexit vote – down 12% against other major currencies - has also driven up supermarkets’ import costs, as have commodity price increases. They also face further cost pressures from the national minimum wage, business rates and utilities.

There are also signs that Asda, the British arm of Wal-Mart, will make life tougher for rivals in 2017.

Analysts say a new management team is starting to make an impact, putting more staff on the shop floor and generally improving store standards. While underlying sales slumped 5.8% in its third quarter, they anticipate a significant improvement when it reports fourth quarter results next month.

Analysts expect Tesco (on Jan. 12) to report UK like-for-like sales growth of 1.25 to 2% for its third quarter to Nov. 26 and growth of 0.6 to 1.5% for the six weeks to Jan. 7, building on four straight quarters of underlying growth.

Morrisons (on Jan. 10) is expected to report underlying sales growth of 1.1% for the nine weeks to Jan. 1, according to an average of analysts’ forecasts, a fifth consecutive quarter of growth.

 Not in Turnaround Mode

Sainsbury’s (Jan. 11) could be perceived as the relative loser of the three, with analysts on average forecasting a like-for-like sales fall of 0.8% for its third quarter to Jan. 7, though it is still expected to report volume growth and underlying sales growth at Argos of 1.5%.

However, it is important to note that Sainsbury’s, unlike Tesco and Morrisons, is not in turnaround mode and has not had to rebase its like-for-like sales performance.

Updates due next week from a raft of other UK retailers, including from Marks & Spencer, department stores John Lewis JLP.UL and Debenhams, Primark owner AB Foods and ASOS.L, will also shine a light on prospects for the sector.

Marks & Spencer will (on Jan. 12) report on its third quarter to Dec. 31. Analysts are on average forecasting like-for-like sales growth in its clothing and home division of 0.2% with underlying sales in its food business down 0.4%.

Such an outcome in clothing would represent an improvement on the second quarter’s 2.9% fall and provide some encouragement to investors that new boss Steve Rowe’s turnaround plan has found some traction.

Last week clothing retailer Next reported disappointing Christmas sales, cut its profit forecast and highlighted “exceptional” levels of uncertainty in the sector.

 

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