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Tesco tops dire Christmas season ahead of Brexit

Tesco comes out on top after a fierce Christmas retail battle though the whole industry faces yet another punishing year that will keep its shares under pressure. 

Light relief 
On the one hand, Tesco’s positive underlying sales back relief among dominant retailers. Like Sainsbury’s, the UK’s largest operator grew key sales in the flagship UK and Republic of Ireland (ROI) region compared to the third quarter of 2017. It also highlighted improvement over the critical Christmas weeks. This relief is lifting shares of the Big 3 this week, including on Thursday. Even Marks & Spencer managed to avoid spoiling the party with food sales falling less than feared. 

The carnage 
But successes are roundly outweighed by carnage at the losing end of the high street. Predictably, retailers with longstanding margin and growth problems suffered most as seasonal shopping was left even later than the year before, forcing a wave of discounts. Shares in Debenhams fell 10%, extending a two-year fall to 90% after it announced the latest in a string of cost crises. Investors punished a profit warning by Halfords with a 25% sell off. 

Tesco’s worst quarter
Even among Christmas winners, weak spots underline that near-unprecedented levels of competition are taking a toll. Tesco’s group performance in the third quarter was its worst of the year, as the cost of stabilising Asian and central Europe operations turned underlying sales deeply negative. Nor did Tesco avoid a rout in general merchandise as the market shifts further online. The category shaved 0.2% off Tesco’s group LFL sales. 

Investors shun Tesco

Despite the latest sign that Tesco is on track to long-term forecasts, its shares are deeply discounted compared to the European sector. Even more vulnerable peers like Morrisons trade at a higher forward valuation. The impact of Brexit on Tesco, the biggest seller of goods to Britons, is the biggest concern for investors who would ordinarily be attracted by its solid financials.

Figure 1 - Tell-tale discount: Investors lower Tesco expectations


Price / EPS for 2019/20

Carrefour SA


Casino Guichard Perrachon SA


Ceconomy AG


J Sainsbury PLC


Koninklijke Ahold Delhaize NV


Marks and Spencer Group PLC


Metro AG


Tesco PLC


WM Morrison Supermarkets PLC


Source: Refinitiv/City Index

Sainsbury’s shares do heavy lifting
Sainsbury’s fared even worse than its bigger rival. The UK No.2’s tiny grocery growth of 0.4% in Q3 was the highlight with total underlying sales down 1.1%. Investors are being patient with the shares due to positive signals from the regulator about Sainsbury’s intended Asda buy. As such, the shares almost single-handedly kept Britain’s food retail index aloft last year, peaking 41% higher in August. But the stock then descended 22%, leaving an 8% climb over a year as the best among UK rivals.

Normalised share price chart: 10th January 2018-10th January 2019 [10/01/2019 14:30:49]

And now, Brexit
Whilst the industry’s watchdog, the CMA, is likely to mandate fewer store disposals as a condition of approval, it is flagged concern about the impact on suppliers.  This leaves Sainsbury’s and the whole sector hanging on an uncertain review, with results due within weeks. Big risks to consumer demand will follow after 29th March. A dire Christmas for retailers could be a test run for the months ahead.

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