Tesco and M&S weather the perils of Christmas

Growing festive UK sales at 1.9% an underlying rate is not an abject failure, for Tesco

Growing festive UK sales at 1.9% an underlying rate is not an abject failure, for Tesco. But with the market on tenterhooks after sub-par trading at other high profile retailers, a share price upset was always likely. It’s worth noting that shares of Marks & Spencer, which reported softer like-for-like sales in both food and clothing & homeware, are being punished more on Thursday. We see M&S as a bit more of a ‘black box’ than Tesco, given the importance of both food and general merchandise to the institution, as opposed to Tesco which still makes most revenues from groceries. M&S shares are therefore taking more of their Christmas pain in one go. M&S also saw contraction on both fronts, despite maintaining a “full price stance in a very promotional market”. Doing so did not preclude “Price investment before Christmas”.  This left a sense of the worst of both worlds for M&S, even though its 0.4% food sales decline over 13 weeks wasn’t as deep as expected. To be fair, an unseasonal October could not have been predicted—though the revenue hit showed M&S’s non-food inventory operation is still not as nimble as it could be.

More broadly, Thursday’s batch of updates does not alleviate renewed investor concerns that the retail sector could relapse into the malaise of a few years back. The news tends to back the suspicion that major operators are running out of levers to pull and are again resorting to discounting. For Tesco and Marks at least, news does not nevertheless indicate they’re coming off track. For Tesco, shares of which were also dented by weak merchandise sales, there’s no question it remains in good enough shape to absorb such disappointments. Net debt, at £3.3bn in October, was less than half the level seen when CEO Dave Lewis joined. Pension deficit pressure has alleviated significantly as well. We therefore do not see the newly reinstated dividend as at risk (though progression is uncertain.) True, the company with the biggest exposure to Britain's high street must pull off an even more finely tuned balancing act than rivals – with a mix of low-margin and full mark-up pricing. And investors are rightly alert to how precarious that act is. But Tesco and its large retail rivals have largely weathered the perils of Christmas, with no worsening of challenging prospects for 2018.

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