Store results set to show rising prices and fears of a downturn
Results from two of Britain’s big four supermarkets due this week are expected to be dominated by the spectre of rising prices and fears of a consumer spending downturn.
Under-pressure food sales will be in sharp focus when Sainsbury’s kicks off with its full-year figures tomorrow.
The big four chain revealed a 0.5% fall in like-for-like supermarket sales, excluding fuel, in its fourth quarter to March 11, down from a rise of 0.1% in the previous three months.
While it said sales would have risen by 0.1% had it not been for the later Mother’s Day and Easter this year, the group warned over “very competitive” trading and price pressures from the weak pound.
Overall sales were boosted by a robust performance from its recently acquired Argos chain, which notched up a 4.3% rise in like-for-like sales over the nine weeks.
The Argos sales hike helped lift group-wide comparable sales into positive territory, up 0.3% in the fourth quarter.
Annual profits will include six months of trading from the Argos business, taken over alongside Habitat when it acquired Home Retail for £1.4bn last year.
Analysts are pencilling in underlying annual pre-tax profits of £578m, including Argos, but experts at Jefferies said their forecasts point to a 15% decline in earnings over the second half with Argos stripped out.
Sales at Sainsbury’s have lagged behind rivals such as Tesco and Morrisons in recent months, with the most recent Nielsen supermarket figures showing its share of the sector falling 0.4% to 15.4% in the 12 weeks to March 25.
There are also worries the Argos acquisition leaves Sainsbury’s exposed to a possible consumer spending downturn sparked by the weak pound’s impact on prices.
Jefferies analysts said: “Strong progress at Argos in recent months only partly moderates the cyclical risks attached to the acquired business.
“In reality, it is under-performance in food sales in the core supermarket chain that is more of a concern.”
Sainsbury’s recently opened its 50th Argos outlet within its stores and has committed to opening 250 Argos concessions over three years.
It also plans to transform 60 standalone Argos stores to a digital format and bolster the number of mini-Habitat stores in its supermarkets from seven to 17.
Meanwhile, Morrisons is expected to report steady sales growth when it releases first quarter results, despite facing industry pressures including rising food prices linked to the postBrexit vote collapse of the pound.
Like-for-like sales growth is expected to reach 1.7% in the first quarter, according to Jefferies, while Shore Capital is forecasting an increase of between 1.75% to 2% over the period.
Analysts say Morrisons is in a better position to handle a tougher trading environment than its peers, with retailers widely expected to suffer as shoppers reign in spending amid rising inflation.
Food prices have already started to rise on supermarket shelves as producers pass on the soaring import costs triggered by the Brexit-hit pound.
“A number of industry sources have confirmed a step up in food prices in recent weeks,” Jefferies said in a research note led by equity analyst James Gzinic.
He pointed to the British Retail Consortium’s (BRC) most recent survey, which showed that food inflation rose from minus 0.8% in January to 1% in March.
In April, the Office for National Statistics (ONS) reported a 1.4% drop in retail sales over the three months to March, marking the biggest quarterly fall in seven years.
Jefferies expects Morrisons’ first quarter results “to confirm this industry trend, but also for the business to have made positive progress in like for like volume terms (something that we do not expect others to be enjoying at this juncture).”
Morrisons earlier this year reported its a 49.8% jump in pre-tax profits to £325m while revenue rose 1.2% to £16.3bn, solidifying the chain’s return to form under chief executive David Potts.
On top of a deal to sell its groceries through tech retail giant Amazon, Mr Potts has ploughed investment into price cuts and called time on underperforming stores in his attempts to turn the page on the supermarket’s ill-fated era under ousted boss Dalton Philips.
His efforts come as the grocery sector’s so-called big four, Tesco, Asda, Sainsbury’s and Morrisons, remain locked in a bitter price war sparked by German discounters Aldi and Lidl.
Shore Capital’s director and head of research Clive Black says the chief executive’s efforts are bearing fruit.
“Morrisons is in much better shape than it has been for some considerable time. We believe that David Potts CBE, CEO, and his team deserve considerable praise for the stabilisation of the business and now entry into what we believe is a period of growth-on-growth.”
Mr Black added that the grocery giant “has a stronger all-round proposition with which to compete to our minds with sharper prices, a better quality private label assortment and a stronger service commitment instore.”
However, he admitted that there is still room for improvement.
Morrisons’ first quarter results will be released on Thursday.