Results atTesco (LSE: TSCO) may have beaten analyst expectations last week, but that saysmore aboutlowCityexpectations than the grocers improving prospects, given that operating profits halved from779m to 354m. Like so many companies on todays flailing FTSE 100, Tesco hasresorted to cost-cutting in a bid to keep the numbers looking good, trimming around400m of fat from group restructuring and more than 50 store closures.
Chief executive drastic Dave Lewis knows his honeymoon period is over but investors are still cutting him some slack. Given the string of disasters that have afflicted Tesco lately, the lack of further bad news such as a profit warning was seen as a plus. It helped investors swallow the news that UK and Ireland operating margins arenowa wafer thin 0.8%.
Tescos Share Price Soars!
The real shock was to find Tescos share price has leapt 15% over the lastweek. A combination of not-quite-as-bad-as-expected results and the wider surge in market sentiment lifting the stock. Sales volumes are rising, which suggests customers may becreeping back, in the hope that Tesco has learned some hardlessons.
Further recovery will not be easy. Tescocant rely on endlesscost-cutting to boost cash flowbut boosting margins wont be easy in todays deflationary world. The glory days will never return, whatever Tesco does, because we live in a different retail world, thanks to changing family shopping habits, online grocery competition, and the rise of Aldi and Lidl. It willalso take a long time to restore the dividend, nowforecast to be just 1% in early 2017. Lewis has done a good job but there is only so much he can do, withsectoral winds against him. Trading at a forecast 23.7 times earnings, hehas to work hard to justify Tescoscurrent pricey valuation.
A Different Taste?
I always felt that J Sainsbury (LSE: SBRY) was unfairly punishedby wider market forces. In January last year it was celebrating 36 consecutive quarters of sales growth, an astonishing run that did less for its share price the longer it lasted, only to behit hard when the record came to an end. But the last 12 monthshave been kinder, with the share price up a healthy 20% in 12 months, and 7.7% in the last week alone.
The recentsecond quarter trading statement was heralded as the first outright positive news from a big four supermarket in years. Again, that reflects low expectations, witha rise in total Q2 retail sales of just 0.3%.
Sainsburys relatively upmarket positioninghas been a blessing rather than the curse it could have been, while the recent Price Match campaign has preserved its position among cash-strapped shoppers. Its decision to reduce promotions and move towards lower everyday prices seems to have chimed with the public mood. Consumers seem contenttopay a little more at Sainsburys, whereas they arent in Tesco.
Investors even get a dividend, although the yield is expectedto dip to 3.8%. Trading at a forecast 12 times earnings, Sainsburyslooks better value than Tesco too. I remain suspicious of the grocery sector, but if the trend towards rising personal incomes continues, Sainsburys could still be worth a place in your portfolio. I remain unconvinced about Tesco, though.
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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.