Tesco the Xmas winner as analysts warn grocers face 'murky new year'

5th Jan 2017 10:31

(ShareCast News) - Ahead of major supermarket groups Tesco, Sainsbury and Morrisons revealing their key festive trading updates next week, analysts predicted a mixed bag for Christmas and a murky New Year.Jefferies analysts said the supermarkets as whole should confirm a healthy close to 2016 but warned the outlook for 2017 "is murkier, with a challenged UK consumer likely providing renewed vigour to discounters".Citing discouraging recent data from elsewhere in the industry, JPMorgan Cazenove remained cautious on the sector due to a belief that "valuations are expensive and expectations high, while the newsflow is turning negative".Societe Generale remained "concerned" by the trading environment but highlighted a mix of negative and positive trends to watch of "potential trading down by some of the middle class, volume growth and food retailers' ability to quickly pass on higher input costs to customers".More bullish than most was Shore Capital on the belief that a "sound" Christmas would result as UK consumer confidence rebounded from the summer shock of Brexit, estimating that "British shoppers went into the holiday season in pretty sound mood with a wish to have a good time".ShoreCap, Morrison's corporate broker, is 'overweight' the sector due to the easing food deflation, improving sales mix and costs that it expects will feed through to better free cash flow generation.Recent data from Kantar has suggested momentum building up at Morrison and fading at Tesco, while Sainsbury's remained the worst performer among the three listed names.Morrison is the first to kick off the reporting season on Tuesday, reporting on the 9 weeks to early January and the fourth quarter, with ShoreCap's forecasts of like-for-like sales growth within a range of 0.25-0.75% excluding fuel represent a decline from the 1.6% in the third quarter.This is short of the 1.2% LFL growth expected by JPM and 1.0% by SocGen, with Jefferies going for 0.7%.Sainsbury's follows on Wednesday, with SocGen forecasting a 1.3% fall in third-quarter LFLs for the food retail business and growth of 3% for Argos since the general online subsector appears to have had another successful Christmas period, while ShoreCap sees flat grocery LFLs and around 1.0% from Argos.JPM sees a 0.8% decline for the supermarkets and 1.0% for Argos and said an in-line performance "should not trigger short covering/further multiple expansion as it would still imply meaningful operational deleverage".While it remains in two minds about Sainsbury's prospects due to the difficulty in predicting the longer term success of the Argos integration, Jefferies felt its grocery business would "likely prove the loser" with a quarterly fall of 0.8%, but that a 2.2% rise from Argos will support consensus "and with it likely drive short-term outperformance".Tesco, which faces the toughest comparative figures from the previous year, will update on Thursday and Jefferies said they should be the highlight, with UK LFL of 1.5% but a more muted 0.6% over Christmas.JPM forecast LFLs of 0.5% for Xmas and 2.0% for Tesco's third quarter, while ShoreCap goes for a range of 1.25-1.75% for the quarter.The market leader should deliver a robust third quarter of 2.7% LFL, SocGen said, thanks to strong improvement in market share trends, with the Christmas period up 1.0%.Marks & Spencer and Booker, the wholesaler and owner of the Budgens and Londis convenience chains, are also due to report on Thursday.While bemoaning this "remarkable feat of uncoordinated investor relations management within the industry", ShoreCap forecast a fall of 0.5-1.5% for M&S and a slight increase in non-tobacco LFL sales for Booker of 0.0-0.5%.Grocery outlookLooking at the longer-term outlook, JPM said the recent rounds of price cuts initiated at Morrison and followed at Asda and Tesco might minimize underlying food inflation when input costs are rising, though flagged upcoming gross margin pressure as it noted the food CPI-PPI gap is the lowest in five years."Ongoing general CPI increases should weigh on discretionary spending and consumer confidence further," analyst Borja Olcese wrote. "There might not have been obvious down trading yet as Xmas is a particular period, but it cannot be ruled out in the months to come, and would likely benefit the discounters. In this context, we found interesting that B&M did well over Xmas and Lidl has stepped up its advertising."Jefferies also noted the input cost pressures as agricultural commodities continue to inflate at a near double-digit rates, sterling remains in the doldrums and oil has rebounded by circa 10%.Pointing to continued sharp pricing by discounters Aldi and Lidl, analyst James Grzinic agreed that Morrison was on the front foot on pricing but said he main concern was for grocers' ability to promptly pass on PPI pressures will be delayed by fears of footfall loss."Inevitably better execution at Asda would make outperformance at both Tesco and Morrisons harder to achieve. However, while the former is priced for consistent share gains, the latter assumes a rather more bearish outcome."