Sainsbury’s beats expectations whilst Tesco still faces hurdles

<p>Both Sainsbury’s and Tesco reported their respective earnings this morning to somewhat mixed reactions in the market but the story still holds true that Sainsbury’s […]</p>

Both Sainsbury’s and Tesco reported their respective earnings this morning to somewhat mixed reactions in the market but the story still holds true that Sainsbury’s continues to outperform its rivals.

After a shocking profit warning issued by Tesco’s in January which triggered a double digit percentage slump in the firm’s shares prices, Tesco announced a radical re-focus towards the UK alongside a £1bn investment aimed at re-establishing its dominance in the UK market. Today’s half year earnings report shows that whilst that turnaround still has a long way to go yet, there are some small signs of tentative optimism.

Tesco returns to sales growth
Tesco reported profits before tax of £1.8bn, a drop of 8.5% whilst group trading profits fell 10% to £1.6bn, broadly in line with expectations. Sales rose 0.1% compared to a fall in sales in the last two quarters of 1.5% and 1.6%.

Looking plainly at the numbers, it’s not a great report from Tesco, but when adding the broader context of the challenges they have faced in the last six months, it’s an ok set of half year results.

The return to sales growth is pleasing but does show that Tesco still has some way to go yet to catch up on its major competitors.

Compare that to q2 sales growth of 1.9% reported this morning at Sainsbury’s, which was much stronger than the 1.4% growth expected and also marked a 31st consecutive quarter of sales growth, which is a remarkable achievement. Sainsbury’s said today that it was well positioned for the Christmas period, but there is a fairly visible question mark on whether Tesco can say the same thing at this point. On the other side of the coin however lies Morrison’s, who last month reported a decline in like for like sales of 0.9%, so there is a fairly wide spread of performance for the UK’s major retailers. Of course we need to add Asda into the mix here as the UK’s second largest retailer behind Tesco, with Sainsbury’s in third place.

Make no mistake however, Tesco are making inroads and this will inevitably be pleasing but the speed of the turnaround will take time and shareholders will need some patience. Undoubtedly the success at Sainsbury’s is making life all the more difficult for Tesco too, particularly as Tesco have been seen to talking up their recovery in recent months. We also know that Tesco recorded their biggest ever week of sales outside of Christmas in the summer as shoppers flocked to Tesco in the run up to the jubilee holiday. So this also perhaps raised the bar of expectations ahead of today’s results and as such, has also weighed on Tesco’s share prices as a result.

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