M&S and Tesco dive on Christmas results

Retail’s “Super Thursday” failed to identify an outright winner from the festive trading season as heavyweights Tesco (TSCO) and Marks & Spencer (MKS) were both given the cold shoulder by investors.

Strong grocery sales meant Tesco came closest to taking the crown, but the supermarket giant was let down by poor trading in general merchandise and disruption to tobacco sales from the collapse of wholesaler Palmer & Harvey.

At Marks & Spencer, positives were harder to find as clothing and home like-for-like sales dropped 2.8% in the 13 weeks to December 30 and food revenues declined by 0.4% on a year earlier. It was more of the same from the retailer, which is forecast to make profits of £582 million this year.

Chief executive Steve Rowe conceded that it had been a “mixed quarter”, with the uninspiring update causing M&S shares to fall by as much as 6%. As was the case in November, it is now in danger of establishing an unwelcome position below the 300p threshold – a key level of technical support – for the first time since 2008.

Investec Securities summed up the disappointed mood of investors today by saying that Rowe’s five-year turnaround plan looked to be little more than a “profit stabilisation strategy”.

With M&S trading on a 2018 price/earnings (PE) ratio of 14.5 and dividend yield of 5.9%, they said the M&S valuation was still not compelling enough given near-term consumer spending uncertainty and poor earnings visibility.

Investec sees better value elsewhere, although it looks like finding these nuggets won’t be easy after an inconclusive run of festive trading updates.

Morrisons (MRW) is perhaps the retailer with the most to celebrate after its stores estate improved like-for-like sales by 2.8% in the six weeks to January 7. UBS analyst Daniel Ekstein said it appeared that sales volumes had found a sweet spot, although there were still concerns about the impact on margins.

The Morrisons result was better than the 1.9% UK growth reported by Tesco for the Christmas period, with chief executive Dave Lewis claiming that the chain had outperformed the market in fresh food following growth of 3.7%.

This was offset by slower demand for general merchandise and lost tobacco sales after the P&H collapse put strain on Tesco’s distribution network at the worst possible time.

Investors will be comforted that Lewis kept Tesco on the right track over Christmas, although today’s update was still enough to halt a mini recovery in shares seen since November to a one-year high earlier this week. The stock was more than 5% cheaper Thursday at 202p amid ongoing fears about the extent that retailers have sacrificed margins to achieve top line growth.

That trend was confirmed today by John Lewis (JLH) Partnership chairman Sir Charlie Mayfield, who said pressure on margins at John Lewis and Waitrose had intensified in recent months “because of our choice to maintain competitive prices”.

John Lewis gross sales were just above £1 billion in the six weeks to December 30, helped by the Black Friday week being the busiest in its history. Sales rose by 3.6% at the department store chain and by 3.1% on a like-for-like basis.

At Waitrose, the Partnership said underlying sales were 1.5% higher in the face of “highly competitive” trading conditions.

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