UK supermarket sector in focus this weeks as Sainsbury and Morrisons announce figures

A big week for UK supermarket shares this week with Sainsbury reporting on Wednesday, Morrison’s on Thursday.

In mid-April Tesco issued a pretty awful set of financial results underscoring the difficulty that Chief Executive, Philip Clarke, is having in getting the giant supermarket group back into shape after the Terry Leahy era. At the beginning of April, the company formally announced the resignation of its finance director, Laurie McIlwee, after 15 years with the company and the last key executive exluding Clarke who saw service under Leahy.

Tesco reported a 6% fall in annual profit to £3.3 billion for 2013 making it the second year in a row for falling profits but it was better than some analysts had feared. Like-for-like sales, excluding new store openings, fell by 1.4% with sales at UK stores open over a year, excluding fuel and VAT, falling 3% in the last three months of 2013, the largest quarterly fall for 3 years. The results included a £1.2 billion write-down on Tesco’s Fresh & Easy US chain of stores and £804 million on its UK property portfolio. The post-tax profits including the cost of the US exit were just £120 million, down 95.7%.

 

Asian profits declined 5.6% to £692 million and in Europe, group trading profit fell 28% to £238 million as sales in Ireland, Czech Republic, Hungary, Poland, Slovakia and turkey all fell. One of the few bright spots was the 11% growth in Tesco.com sales.

Tesco under Clarke appears to be rudderless right now with an apparent lack of focus with dozens of initiatives in play to try to revive flagging profits including the roll out of coffee shops. Since he took over in March 2011, investors in Tesco have had to digest one piece of bads news after another. No wonder Buffett is selling down his stake in the supermarket. Berkshire Hathaway  sold about 115m shares in the last year a drop of 30%, 35 million more than previously reported, leaving him with just over 300m, or about 3.7% of the company.

Those that have left the Tesco management team including Andrew Higginson, Tim Mason, David Potts, Richard Brasher and Dame Lucy Neville-Rolfe must all be relieved to be away from the mess! Its a bad sign where the management team of any company is decimated and it seems many are unwilling or unable to work with Philip Clarke and apparently highly abrasive style.

Whereas historically the UK business was the cash cow with its profits ready to be ploughed into the company’s international ventures, the home base looks under serious pressure. Many UK stores look shabby after years of under investment and the company is forced to compete on price using discount vouchers and deep cut price promotions. Margins look to be under continued pressure as it tries to investment in the customer experience whilst fighting the discounters and the other members of the big 4 – Asda, Sainsbury, Morrisons. Clarke has announced a £200 million investment in lowering prices and is installing Giraffe restaurants and Harris & Hoole coffee shops in Tesco Extra’s to improve the overall consumer experience.

Tesco, Sainsbury and Morrison’s shares have all been under pressure recently as the customer has voted with their feet and increasingly began shopping at discounters Aldi and Lidl. An increased focus on quality as well as low price has persuaded even the middle classes to buy their smoked salmon and champagne at Lidl.

Morrisons has announced big price cuts this year to try and stem the decline in its sales and committed £1 billion over the next three years to lowering prices and improving own-brand food whilst Tesco is refreshing 650 stores across the UK over the three years.

Justin King who has been at Sainsbury since 2004 is hoping his successor doesn’t suffer the same fate as Clarke. In March the company reported like-for-like sales had fallen for the first time in nine years, ending a run of 36 consecutive quarters of like-for-like growth under King.

King is leaving Sainsbury after 10 years on July 9th and will be replaced by Mike Coupe, the commercial director. Roger Burnley will move from his existing role as managing director of general merchandise, clothing and logistics to become retail and operations director.

Profits are expected to grow 3.5% or £782 million for last year but the focus is on expectations for 2014/2015 with many analysts expecting a decline in profits given margins will be under pressure in this new era of price cuts as a price war looms. Some are expecting Sainsbury to reduce store openings and cut its £1.1 billion annual capex programme.

Dalton Philipps

Morrisons Chief Executive, Dalton Philipps, is expected to be under increasing pressure with expectations of sales down 6-7% for the first 3 months of 2014, compared with a 5.3% fall over Christmas. The supermarket has already announced plans to cut its range in stores by 20 percent and its cost base by £500 million to reduce complexity and costs to enable it to compete more successfully on price.

The shares of Sainsbury, Tesco and Morrisons have had a rough time over the last year, with Asda part of the Walmart Group.

Sainsbury shares are down 16% over the last year and are currently at 326p, giving a yield over 5% and p/e around 10.

Morrisons at 201p are down 31% in the last year and have a yield of over 6% with p/e over 9.

Tesco shares are down 22% in the last year at 287p with a dividend yield over 5% and p/e of 9.

The big question for all the big supermarkets is where are margins heading and the answer is down. Sainsbury with the lowest operating margin of the large supermarkets is seemingly most exposed. The cosy days of the 1990’s and 2000’s seem to be over and that means lower earnings for shareholders for the foreseeable future. This week will be fascinating to see the impact of Morrison’s declaration to fight back with heavy investment in price cuts. Still the dividend yields look chunky and there’s no sign of a cut anytime soon.

Contrarian Investor UK

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