In the wake of the raft of recent trading updates, HSBC thinks it was a good Christmas for sales and margins for all the food retailers, although for some more than others, notably Tesco PLC (LON:TSCO) and William Morrison Supermarkets PLC (LON:MRW).
In a sector review for clients, looking at Christmas past, the bank’s analysts noted that Morrison’s upgraded its guidance, while market leader Tesco said it hoped to do a little bit better than guidance,
They pointed out that number two player J Sainsbury plc (LON:SBRY) held its guidance but was the weakest of the three-quoted ‘Big Four’ supermarket firms, particularly in terms of in-store like-for-like food sales, although its acquisition of general retailer Argos performed well.
Looking to Christmas future, the analysts think that inflation is the most contentious issue currently, with the cost of goods sold rising due to the big depreciation in sterling since June’s Brexit vote.
However, they think this will not bring in as much retail inflation as some expect.
Elasticity so fine ...
In their note, the analysts said: “High cross-price elasticity and high operational gearing mean it is advantageous for a retailer not to pass price increases on if its competition does.
“Growing retailers will also be able to mitigate some costs through a high contribution margin from marginal sales. Inflation is likely to accentuate trends that are already visible.”
Thus, they believe, the gap between winners and losers in the sector is likely to widen and this should be reflected in share price performance.
The analysts repeated their ‘buy’ rating on sector leader, Tesco, and increased operating forecasts for the group by around 2% for this year, 4% for 2018, and 17% for 2019.
However, they also increased their capex forecast for Tesco to £1.4bn, in line with guidance, offsetting the increase in profits to leave their discounted cashflow-derived target price for the stock unchanged at 260p.