Two household names Tesco (LON:) and Marks and Spencer (LON:), have had differing fortunes this year and the share price reactions have echoed the gap – until today, it would appear.
Tesco
Another robust performance from the Tesco juggernaut has, on this occasion, hit the wall of higher expectations.
Metrics were mostly positive, but investors have chosen to focus on a relatively light period of growth by Tesco standards, and a subpar contribution from the Booker unit. The group is also maintaining its conservative guidance – a source of some disappointment earlier in the year – although it now expects adjusted operating profit to be at the higher end of the £2.9 billion to £3.1 billion range it previously guided.
Like for like sales growth of 3.1% for the quarter and 2.4% over Christmas was underpinned by several strong showings. The Finest range saw sales growth of 13%, online 11% and Whoosh 47%, where the latter added 250000 customers over the period.
Any such progress comes alongside not only ferocious competition but also pressure on increased costs, given the Budget measures which have now been implemented on the likes of the minimum wage, National Insurance contributions and business rates. In addition, Tesco’s advances inevitably lead to progressively higher expectations, which in turn lessens the likelihood of positive shocks for investors. Maintaining lower prices also comes with an inevitable impact on revenues.
Even so, in the recent past and try as they may, other supermarkets have tended to take market share from each other rather than from Tesco, whose dominance in the British aisles is undiminished. Its current share of 28.7% is more than that of its two nearest rivals, Sainsbury (16.3%) and Asda (11.4%) combined and its highest in over a decade. The group’s sheer scale feeds its appetite for lowering prices for customers through the likes of Aldi Price Match, Low Everyday Prices and Clubcard Prices, while a strong focus on significant cost reduction creates something of a virtuous circle. As such, the ongoing battle is still for Tesco to lose rather than its rivals to win.
Aside from the distraction of a snub from investors at the open, the share price has tended to mirror Tesco’s inexorable progress. The shares have risen by 22% over the last year, in line with the wider ’s gain of 21.8%, and by 87% over the last three years, a considerable achievement given the traditional ferocity of sector competition. The market consensus of the shares a buy may even be strengthened by what some may view as an attractive entry point given the opening fall.
Marks & Spencer
M&S has yet to shake off its cyber hangover and although Christmas sales were solid, they were below estimates which is a slight disappointment.
That being said, there is little doubting the ongoing resilience and strength of the Food business, which accounts for 54% of group revenues. Sales increased by 6.6% to £2.72 billion in the quarter, reaching a new milestone market share for the group, and where innovation and quality upgrades continue to propel performance.
In addition, prospects remain bright for the unit, which is a clear focus of the group’s push for growth in terms of new stores and general investment. Quite apart from the enduring appeal of its specialist food ranges, the nature of these revamped stores has led to a noticeable increase in customers choosing M&S for their full shop.
The performance of Fashion, Home and Beauty undermined some of the overall progress, with sales dipping by 2.5% to £1.28 billion. The digital part of the business is still in recovery mode, while reduced high street footfall was a headwind. More positively, the group noted that its new season sales were showing some strong signs of resonating with shoppers, playing into its new target market of the “modern mainstream customer” as the company attempts to throw off the shackles of a previously dowdy and tired image.
There are also increasing signs of life at Ocado Retail, where M&S sales on its website grew by 16.3% and accounted for 30% of total Ocado sales. Overall however, and excluding Ocado, group revenues were 3.3% higher at £4.15 billion which was markedly below the £4.3 billion which had been expected.
M&S will be glad to see the end of a year where the cyber disruption was the unfortunate highlight. Even so, the group’s healthy financial position helped it to weather the storm, and indeed M&S continued to make investments in the business despite the cyber-related costs elsewhere. The shares have inevitably struggled, losing 14% over the last year as compared to a gain of 21.8% for the wider FTSE 100. However, viewed through a longer-term prism, the direction of travel remains clear. The shares have gained 139% over the last three years and the group expects to bounce back as it accelerates its reshaping strategy. Investors are also giving the group the benefit of the doubt, with the market consensus remaining at a buy.