Blackfriar: Could the grocery sector prove to be a festive disaster?

Shares in fashion retailers jumped on the news that Next had a pretty good Christmas, beating warnings of a dire festive period for retailers.
Morrisons' CEO David PottsMorrisons' CEO David Potts
Morrisons' CEO David Potts

Next is flagg​ing some of its own improvements but accepts that the colder weather on the way into Christmas was helpful and therein lies the good news for the sector.

Analysts at Liberum said ​Christmas trading is clearly better than many may have feared, helped by cold weather and no doubt Next taking part in Black Friday for the first time.

Hide Ad
Hide Ad

There is a positive read across for fashion retailers that have strong brands.

Next kicked off the Christmas reporting season with an upbeat trading statement. Analysts at Peel Hunt said Next’s full price sales growth was above the top end of the range, and the stock going into the sale is down handsomely.

​Peel Hunt analysts said they​ have long believed that conditions were not as bad as many believed for the consumer and ​they​ expect the next few weeks’ statements will show that companies with the right offer can do very well.

We will learn more over the coming weeks as retail giants such as Marks & Spencer and Tesco report their festive trading figures.

Hide Ad
Hide Ad

Before Christmas it was thought that the grocers would do very well, but analysts are now doubting this. Analysts at ​Deutsche Bank​ ​​are warning that ​trading updates from Sainsbury​‘s and Morrison​s could disappoint next week with ​both expected to see ​a slowdown in sales growth​.​ ​

The bank has forecast Morrisons will report a 1.0​ per cent​ increase in retail like-for-like​ ​sales over the 10 week holiday trading period, ​down from a 2.1​ per cent​ rise in the third quarter.​ ​Sainsbury’s is expected to post a 0.4​ per cent​ rise in retail ​like-for-like​ sales in the third quarter, down from 0.6​ per cent​ growth in the second quarter.​

​Analysts at Hargreaves Lansdown ​believe that Tesco saw the green shoots of recovery coming through last year, allowing the company to resume dividend payments after a three year hiatus. It also implemented a compensation scheme to shareholders affected by the 2014 accounting scandal.

​They said that​ Tesco​‘s​ challenge in 2018 begins with a ‘B’, but ​it ​isn’t Brexit. The £3.7​bn takeover of Booker Group ​received​ the green light shortly before Christmas, but it could prove a major challenge.

Hide Ad
Hide Ad

The supermarket sector is having to re-invent itself, with Sainsbury’s taking over Argos, and Morrisons teaming up with Amazon and McColl’s, so Tesco doesn’t want to rest on its laurels while its peers move onwards and upwards.

​Hargreaves Lansdown said​ Tesco has just got back ​on​ its feet and the worry is the supermarket is trying to run before it can walk again. A good Christmas trading update would mean CEO Dave Lewis can approach the forthcoming vote from a position of strength.

However a poor performance over the festive period would unsettle shareholders’ confidence in the deal.

​At M&S ​things ​are not as bad as they have been in the ​c​lothing and ​h​ome division, but the ​f​ood business, which has kept sales afloat in recent years, has started to struggle. I​n response to declining fortunes in this side of the business, M&S recently decided to scale back its Simply Food store opening programme.

Hide Ad
Hide Ad

It’s still early days in the M&S turnaround plan, and management are working on a five year horizon to get the retailer in shape.

​We were expecting that fashion sales would be the Christmas disaster, but if Next is anything to go by, ​fashion retail may scrape by - helped by the cold snap just before Christmas.

​What will come as a shock is a downturn amongst the grocers, which are seen as a resilient force during tougher economic times. Tesco appears to have regained its mojo, whilst the discounters grow in strength.

All of this is bad news for Sainsbury’s, Asda and Morrisons.

We will need to see the festive figures before we can see how hard Tesco’s renaissance is hitting its rivals.

Related topics: