Tesco and Sainsbury’s Earnings Report – What to Expect?

<p>On Wednesday, two of the UK’s leading supermarket chains Tesco and Sainsbury’s, updates shareholders and the market on their performance. The battle of the supermarket […]</p>

On Wednesday, two of the UK’s leading supermarket chains Tesco and Sainsbury’s, updates shareholders and the market on their performance.

The battle of the supermarket retailers remains a fascinating event, as not only can we use them as a broader gauge of the general health of the UK consumer (note that £1 in every £10 spent in the UK arrives in Tesco’s) but it can also provide another opportunity to see whether Tesco can continue to bounce back from weakness earlier this year after the chain lost market share to its competitors such as Sainsbury’s.

On Wednesday morning at 7am, before the start to trading in the UK, Tesco reports their half year earnings whilst Sainsbury’s will update the market on its trading in the second quarter. We will get a much updated picture on how the UK grocery market is faring as we head into the final months of 2012.

Earnings Outlook

First and foremost, it’s important to remember where we are with Tesco. The company shocked the market in January when it reported its first profit warning in 20 years, triggering a 16% one day drop in its shares price, which has struggled to recover ever since.

CEO Philip Clarke has since announced a turnaround plan, investing £1bn into its main UK business in an effort to maintain footfall to its stores at a time when it has lost market share to rivals such as Sainsbury’s, Morrisons and Asda (owned by US giant Walmart). Major store rebrands and a focus back to food  with an ‘everyday value range’ – its comfort zone – from non food items has been two key elements of the change in strategy, to help bring customers back to its stores.

The question inevitably posed then is whether Tesco has been making inroads already or will it take time? Recent data from Kantar, a market research firm, said that Tesco’s market share fell marginally from 30.9% to 30.8% in the last three months to the end of August, which is fairly resilient. Kantar also said that Tesco’s sales rose 2.8% over the same 12-week period but behind 4.5% growth at Asda, and 3.8% at Sainsbury’s. So this could be an indicator that whilst Tesco’s sales have likely improved, they still lag behind the broader market. Then again, they are dealing with a significantly larger size.

Recent UK retail focused economic data has also indicated tentative signs of improvement. The recent GFK monthly consumer confidence index rose to -28 in September from -29 in August, indicating marginally healthier consumer morale although at -28, this remains a highly fragile number. At the same time, recent data has also shown that there has been a 0.6% rise in retail sales volumes from June to August, though we must adhere to the Olympics effect here too.

In June, underlying quarterly sales at Tesco fell 1.5%, which was in line with expectations after the January profit warning. The previous quarter has seen sales fall 1.6%. The general tone of the quarterly update was things weren’t getting worse, but equally they were not getting imminently better, just yet.

Signs of confidence from Tesco

In recent weeks, however, Tesco has itself echoed some broad signs of confidence. We already know that Tesco enjoyed its biggest ever week of sales outside of Christmas this year in the four-day run up to the Queen’s Jubilee holiday in June with over £1bn in sales. This will influence their half year reports, a factor which Sainsbury’s included in their previous quarter figures.  Tesco’s UK operational strategy and business director recently said “we’re really pleased that we are starting to see the green roots of progress.”

So there is certainly cause for optimism if Tesco can deliver a decent set of results but investors need to be mindful that this report will not just be about the first half of the year, it will be about the second half projections also. Remember that stock investors trade on future earnings, and with Tesco’s shares prices remaining some 18% below levels before the profit warning, many investors are waiting to see the upside in language before trading on expected upside in shares price.

It is also worth noting at this point that Morrisons has already reported better than expected first half year earnings, which of course raises the potential and indeed optimism, that Tesco or Sainsburys should follow suit.

Forecasts

Tesco is expected to report a drop of 10% in trading profits to £1.6bn, with UK trading profits falling 13% to £1.11bn.

Sainsburys on the other hand are also expected to sales growth to remain consistent with the first quarter, with second quarter sales remaining flat at 1.4%.

Shares price

As already detailed, Tesco’s shares price (in blue) remains under pressure and whilst we have certainly seen many clients go long their shares price hoping for a bounce from January’s profit warning induced falls, this has not been forthcoming as of yet in the underlying shares price. Sainsbury’s (in red), which has delighted the market this year and grabbed market share away from Tesco with their brand match campaign, continues to be well supported and has firmly outperformed the sector in general. Morrisons (in green) has failed to perform as strongly as Sainsburys but earlier this month saw a strong price increase after reporting better than expected first half year profits.

 

 

 

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