Oriel highlights upside risk at Tesco as grocers report on Christmas trading
With all three of the listed UK supermarkets due to report on Christmas trading this week, Oriel Securities has predicted that Tesco is the most likely to “surprise on the upside”.
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Like-for-like (LFL) sales at Tesco “should benefit from improved customer service and aggressive promotional and vouchering activity”, the broker said.
However, it warned that forecasts “should equally be fully-loaded for the costs of this”.
Oriel said: “Improved trading is clearly good for getting some momentum back into the business and improving morale, but against last year's profit-conserving LFL weakness we wouldn't deem it a ‘recovery’.”
The broker expects Tesco to report a 4.5% decline in LFL sales when it releases its fiscal third-quarter update on Thursday, compared with a 5.4% drop in its second quarter.
Sainsbury’s third-quarter LFL sales are predicted to fall by 2.5%, slightly better than the 2.8% decrease seen in its second quarter. Sainsbury's reports on Wednesday.
As for Morrisons, the grocer is expected to report a 5% drop in LFL sales in the first six weeks of its fourth quarter when it updates the market on Thursday. While this marks an improvement on the 6.3% decline registered in its third quarter, Oriel said that the company is at most risk of a downside surprise out of the three retailers.
“Morrisons' margin of industry underperformance has typically widened during important trading periods such as Christmas and Easter in recent years, impacted by targeted competitor activity and vouchering,” the broker said.
“Hence, while we believe the business continues to make significant progress in building a more sustainable solid footing beneath the sales line, we think it could have seen some loss of relative momentum over the Christmas period given heavy vouchering activity by competitors.”