After a bumper week for supermarkets, which saw Tesco, Morrisons and Sainsbury’s report better-than-expected Christmas period sales, FE Trustnet reveals how managers of different styles are approaching the sector.
Market figures from consultancy Kantar Worldpanel for the 12 weeks ending 1 January 2017, showed the fastest recorded growth since June 2014, thanks to an additional consumer spend of £480m increasing total supermarket sales by 1.8 per cent.
Fraser McKevitt, head of retail and consumer insight at Kantar Worldpanel, said: “Year-on-year market growth has been helped by comparisons to a weaker Christmas in 2015, but sales were also buoyed by strong consumer appetite for festive celebration after a turbulent year.”
Additionally, after 28 months of deflation in the market, like-for-like grocery prices increased by 0.2 percentage points to bring a return to inflation.
McKevitt said: “The long-anticipated return to inflation suggests that the speed of growth in the overall market will continue to hasten in 2017, and both consumers and retailers will be looking at ways to avoid increasing the cost of the weekly shop.”
This will be welcome news to investors in the supermarket chains, with Sainsbury’s, Tesco and Morrisons all struggling in recent years due to price wars and the rise in prominence of the German discounters Aldi and Lidl.
Performance of stocks and sector over 5yrs
Source: FE Analytics
As the above chart shows, all three chains have struggled over the past five years, with Tesco the worst performer, down 38.41 per cent, while the wider sector has lost 18.13 per cent.
This week, Morrisons saw its share price rise to a two-year high of 247p, following its strongest Christmas sales performance in over seven years.
Under chief executive David Potts, the company has been focusing on making the stores nicer, employing more staff and improving the quality of goods in an effort to turn the business around.
Neil Wilson, senior market analyst at ETX Capital, said: “This was yet another standout set of numbers from Morrisons, which is enjoying a hugely successful turnaround under CEO Dave Potts. In November the company reported its fourth straight quarter of sales growth and looks on track to make that five in a row.”
Meanwhile, Sainsbury’s also performed better-than-expected thanks to the acquisition of Argos last year, which saw overall like-for-like sales rise by 1 per cent.
Laith Khalaf, senior analyst at Hargreaves Lansdown, said: “Argos pulled Sainsbury’s up by its bootstraps over the Christmas trading period, as the supermarket business failed to generate any sales growth on its own.”
“However against a backdrop of food deflation, flat sales are a pyrrhic victory for the supermarket, and represent an improvement on performance so far this financial year.”
The final company to report its Christmas sales figures was Tesco, which reported mixed results following underwhelming like-for-like sales but its first quarterly market share growth since 2011.
The Hargreaves Lansdown share research team added: “There are signs that the giant might be stirring once again, but a slow down over the Christmas period will leave many investors worrying whether the group can achieve sustained growth.”
Below, FE Trustnet looks at the funds most invested to the stocks and the ways in which the managers are playing the sector.
Value
The largest funds to hold the major supermarkets are those with contrarian approaches focusing on those companies that are on low valuations that they believe are ready to be turned around.
Turnarounds can take many forms, and all three major UK supermarkets have gone through changes in recent years: Sainsbury’s acquired catalogue retailer Argos while both Morrisons and Tesco have made management changes.
Tesco, under new chief executive Dave Lewis, has the furthest to recover, with the company’s share price reaching its lowest point since the 1990s in mid-2016.
Performance of Tesco share price since 1995
Source: FE Analytics
While the share price has recovered from last year’s lows of 143p it is still some 284p below its peak of 487p in 2007 and currently sits at 203p.
Unsurprisingly, therefore, the value-based £1.5bn Jupiter UK Special Situations, £1.2bn Investec UK Special Situations and £1.1bn Artemis UK Special Situations all include Tesco among their top 10 holdings.
Conversely, Investec Special Situations is the only value-focused fund over £500m to own Morrisons and no funds hold Sainsbury’s.
Had this been conducted a year ago, it is likely more value strategies would have counted Morrisons in their top 10 but the company has risen by 44.40 per cent over the past year allowing many to sell down their positions.
Income
While fewer value funds own Sainsbury’s and Morrisons than in the past, both supermarket chains appear in a significant number of equity income funds.
Income has been hard to come by in recent years with banks yet to make a return to the dividend roster, Meanwhile, mining stocks – a large constituent of the dividend payers in the UK – have cut and in some cases scrapped their payouts.
As a result, companies such as Sainsbury’s – which paid out 12.10p in dividends last year – and Morrisons – which paid 5p last year – have proved popular with income managers.
This is despite these figures being 8.3 per cent and 63 per cent lower respectively than the previous year’s dividends.
The largest fund to include Morrisons among its top 10 holdings is the £3.5bn, five crown-rated Threadneedle UK Equity Income, which has a 4.2 per cent weighting to the firm.
The Threadneedle UK Equity Alpha Income, Threadneedle UK Growth & Income and Schroder ISF European Dividend Maximiser also include the supermarket among their top 10.
Meanwhile the five crown-rated £70m Wise Income fund run by Tony Yarrow is one of the few to keep Sainsbury’s in its top 10 holdings.
The fund, which currently yields 4.90 per cent and has a clean ongoing charges figure of 0.99 per cent is 3.11 per cent weighted to the supermarket chain.