It is some months since I studied the supermarket sector in any depth and Im sad to report on my return that things havent improved, and the big grocers continue to serve thin gruel to investors.
Shop horror
Over the last month, Tesco (LSE: TSCO) has continued its long-term decline with the share price falling more than 12%. WM Morrison (LSE: MRW)and J Sainsbury (LSE: SBRY) have also fallen,albeit with aslightly slower dropof just over5%. Brexit has become the catch-all excuse for any company with a bad story to tell but in this case the supermarkets have a point.
The shock referendum result fuelledthe biggest drop in consumer confidence in more than 26 years in July, according to market researcher GfK, withshoppers bracing themselves for further erosion oftheir spending power as the weaker pound drivesupthe cost of imported goods and ingredients.Brexit isnt the only factor behind the 1.1% drop in sales in the four weeks to 17 July, the worst performance in two years, as measured by Kantar Wordpanel. Thedisappointing British summer has also hit revenues, with rain and wind dampening shoppers appetites.
This means war
Now Morrisons is throwing down the gauntlet to its rivals by unleashinga new price war as it looks to blowshoppers out of their post-referendum malaise. It plans tocut the price of more than 1,000 products by an average of 18% in a bid tolure themaway from mighty discounters Aldi and Lidl, which saw sales rise 11% and 12.5% respectively in the three months to 17 July, liftingtheir market share to 6.2% and 4.5%.Fast-growing upmarket rivalWaitress and Co-ops small local stores are also nibblingaway at Tescos, Sainsburys and Morrisons market shares.
Price cutswill help Morrisons shoppers, but I cantsee that theyll do much for its profits orshare price, and theyllalso inflict further damage on Tesco and Sainsburys, especially if theyre forced to join in the price-slashing battle. All is not lost, Tescos earnings per share (EPS) are forecast to grow 133% in the year ending 28 February 2017, reducing its valuation from todays 45 times earnings to a still pricey 24 times. This offers some relief following five years of negative EPS (double-digit negatives in four of those years, mark you). Tescosmarket share is falling but at the slowest rate for two years, and it remains the grocery sector big boy with28.3% of sales.
Not so supermarkets
Sainsburys has a share of 16.3% but is also declining slowly, althoughtrading at 9.19 times earnings and yielding 5.43% it remains mypick of this shop-soiledtrio. Morrisons has done better than I would have expected in recent months and whilesales continue to slip it still boasts 10.7% market share. However, trading at 23.05 times earnings and yielding 2.78%, I can think of a dozen different companies I would rather invest in today.
Tesco, Sainsburys and Morrisons are struggling to shake off the spectre of long-term decline, and a fresh price war could wound them all. I will expend my ammunition elsewhere.
The doom-mongers say Brexit is a disaster for
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the UK, but it has been great news for the FTSE 100.
Smaller companies have struggled and if Britain does slide into recession then the turbulence will continue.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
