Tesco Plc (TSCO), the U.K.’s largest grocer, may provide investors with signs of recovery next week as it reports sales that analysts expect will outpace those of competitor J Sainsbury Plc (SBRY) for the first time in three years.
The supermarket company may say six-week revenue at stores open at least a year rose 1 percent, excluding gasoline and value-added tax, according to the median estimate of 10 analysts surveyed by Bloomberg News. That would be the strongest growth since 2010 and only the second positive performance in eight quarters. Sainsbury’s sales on the same basis probably rose 0.9 percent in the third quarter of the fiscal year, the estimates show, less than the prior quarter’s 1.9 percent gain.
Tesco’s figures, while flattered by comparison with what the grocer described as “disappointing” sales a year ago, are likely to show that Chief Executive Officer Philip Clarke’s efforts to regain customers are paying off. The CEO is investing 1 billion pounds ($1.6 billion) to provide additional staff, new products and brighter stores. He’s also seeking to woo shoppers with money-off vouchers amid a grocery market that’s facing record levels of promotions and rising food-price inflation.
“Tesco has improved service and is likely to have been the relative winner over Christmas,” said Dave McCarthy, an analyst at Investec Securities with a sell rating on the shares. Still, the estimated growth in sales represents “a significant volume decline” given the pace of inflation, he said.
U.K. inflation held at a five-month high of 2.7 percent in November, outpacing wage increases.
Tesco is scheduled to report Christmas sales on Jan. 10, a day after Sainsbury. An improved performance from the Cheshunt, England-based retailer over the holiday period probably weighed on its rival, according to James Griznic, an analyst at Jefferies International. Sainsbury, the third-largest U.K. supermarket chain, may have “returned to Earth with a bump,” said John Kershaw, an analyst at Exane BNP Paribas in London.
Sainsbury’s sales are expected to beat those of smaller competitor William Morrison Supermarket Plc. (MRW) Morrison, the fourth-largest U.K. grocer, may say same-store sales declined 2.5 percent in the six weeks ended Dec. 30, according to analyst estimates, putting profit estimates at risk.
Morrison will “kick off the January trading season in a weak manner” when it reports sales on Jan. 7, said Griznic of Jefferies, Morrison’s brokerage adviser.
Other U.K. retailers scheduled to announce holiday sales include Debenhams Plc (DEB) on Jan. 8 and Marks & Spencer Group Plc (MKS) on Jan. 10. Marks & Spencer, the U.K.’s largest clothing retailer, may say same-store sales at its general-merchandise unit fell 1 percent, while food revenue gained 1 percent on the same basis, according to the median estimate of nine analysts.
For Tesco, a 1 percent gain in same-store sales would represent “real growth in a very tough market,” Richard Perks, a retail analyst at Mintel International, said by phone. “It’s really fought back effectively in food, and is going head-to- head against an improved offer in Sainsbury.”
Clarke has run Tesco’s U.K. stores since March last year, taking over after Richard Brasher stood down from the board in the wake of the failed Big Price Drop campaign and the first reduction of profit guidance in two decades.
Chris Bush, chief operating officer of the retailer’s domestic business, is considered by the grocer to be a frontrunner to take over the role of U.K. CEO, a person familiar with the matter told Bloomberg News last month.
The U.K., which accounts for about two-thirds of Tesco’s sales, is “too big for one man” to run, said Perks. Clarke’s job has to be “strategic and motivating, not hands on.”
Tesco’s possible revival is likely to coincide with a worsening decline at Morrison, which according to Jefferies’ Griznic is being hurt by competition from discounters such as Aldi and Lidl, particularly in its north of England heartland. The grocer has also been affected by an acceleration of the shift toward online shopping, which it doesn’t offer, he said.
The deteriorating sales may mean Morrison will have to pare profit expectations, according to Exane BNP Paribas’s Kershaw.
“There is a risk that, with convenience and online start- ups to roll out, and with the core estate significantly underperforming, Morrison may announce that it needs to invest more in its offer,” Kershaw said.
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