Earnings look ahead: Morrisons, Sainsbury’s, Tesco

Supermarket Christmas trading statements

The turn of the year was a mixed one for retailers, since while HMV collapsed into administration (for a second time), Next managed to report a decent bounce in activity. The focus turns now to the supermarkets, all three of the listed ones reporting trading statements in the coming week.

While supermarkets are less exposed to wide swings consumer spending, the festive period is still a vital one, with sales often twice the levels seen in ‘normal’ months. Consumer spending remains under pressure, which means the budget supermarkets could well see further improvements in market share at the expense of the bigger firms.

Falling inflation helped shoppers in the run-up to Christmas, easing cost pressures on the consumer, while the calendar element is also likely to have boosted performance. The last time Christmas Day fell on a Tuesday was 2012, and the Saturday before was the busiest day of the year for retailers, which bodes well for performance this time around. In addition, Kantar data suggests that spending on own-label premium lines was up 5.5% in the run-up to Christmas, suggesting that shoppers are prepared to spend more on occasion despite weaker consumer confidence.

Morrisons (Q4 trading statement 8 January)

Morrisons has seen sales growth slow over the year, and much of the recent improvement in recent quarters was down to higher spending on fuel, an element that will ease due to the reduction in oil prices seen in the fourth quarter (Q4). However, the positive corollary of this would be increased spending on food and other goods, so the effect will be mixed.

The recent McColl's deal has seen some weakness due to supplier switches, but this should ease as the group heads into 2019. At 15 times earnings, the shares are trading fractionally below their five-year average of 16.4.

The shares have declined relentlessly since September, and are currently testing the post-2015 uptrend. If the price can move back above 217p then a short-term rebound is in place, while further declines target the lows of early 2018 at 199p.

Sainsbury’s (Q3 trading statement 9 January)

An improvement in sales here will help bolster Sainsbury's as it continues its quest to merge with Asda. Its online performance has been improving notably, but it now needs a pickup in volume to reinforce these improvements.

At 12.6 times earnings, it is more expensive than its five-year average of 12.1, but is no longer trading at the 16 times forward earnings we saw in mid-2018, which saw Sainsbury’s hit its most expensive level in more than five years.

There has been little stopping the decline since the end of November. Downside targets lie at 254p and then all the way back to 228p. Any rally will target 274p, 277p and then 283p.

Tesco (Q3 trading statement 10 January)

A sustained recovery in performance over the summer means that Tesco has its work cut out to maintain growth. Nonetheless, cost-cutting and better market share have bolstered performance, and we have seen improvement in performance for its own value brands following the refresh of its product lines. Future trading will likely revolve around the battle with Sainsbury’s-Asda, should the merger finally take place.

Of the three firms, Tesco is the cheapest on forward earnings versus its five-year average, at just 11.8 times earnings compared to an average of 17.2. This is the cheapest it has been since late 2014.

Tesco shares have managed to recover the post-2015 rising trendline, and the sharp jump of late provides the best hope that the sector might be on the cusp of a recovery. The downward trend from the 2018 highs, and the 50-day simple moving average (SMA) of 204p, mean that we have to see a push above 205p to provide a more bullish view. A reversal and close back below 186p opens the way to 182p and then 172p.