The UK retail sector has had a tough couple of years. Some chains have disappeared entirely. On Wednesday, camera retailer Jessops called in administrators.
As for the supermarkets, they are facing stiff competition at the budget (Aldi, Lidl) and premium (Waitrose) ends of the market. Food price inflation comes at a time when their shoppers are already feeling the pinch.
Using data from recent trading statements, I have taken a look at four of the biggest retailers in the FTSE 100 (UKX): Marks and Spencer (LSE: MKS), WM Morrison Supermarkets (LSE: MRW), Sainsbury's (LSE: SBRY) and Tesco (LSE: TSCO) (NASDAQOTH: TSCDY).
Marks and Spencer
M&S was forced to release its trading update on Wednesday night (ahead of the scheduled release) after Sky News got hold of an apparent leak. The results were not good reading for investors and the shares fell 4.5% on Thursday morning.
The problem was that like-for-like UK sales were down 1.8% on last year's performance. While food was up 0.3%, general merchandise was down 3.8%.
That's a worrying decline. Marks and Spencer's nearest rival for general merchandise, Next, reported an increase in sales over the year. It is hard to escape the conclusion that M&S is falling behind.
I discussed Marks' future with Kate Calvert, retail analyst with investment bank Seymour Pierce. "The Christmas performance is disappointing," said Kate. "The valuation is about fair given the turnaround potential and the increasing speculation of private equity interest."
WM Morrison Supermarkets (Morrisons)
Of the four, sentiment toward Morrisons is the worst. The shares currently trade at a price not seen since the dark days of the financial crisis.
Investors have been frightened in the last year by the amount of market share that Morrisons has been losing to its rivals. As shareholders have been selling out, Morrisons' valuation has been compressed. The shares currently trade on 9.5 times consensus forecast earnings for 2013. The forecast yield is 4.6%, the highest that the shares have ever offered.
One of the biggest criticisms Morrisons faces is its lack of online or high-street 'convenience' offering. Just how important is this?
Kate Calvert says "The jury is out on how profitable online and Morrisons' new fresh convenience format might be, but when the only growing channels in food retail are online and convenience, not having either is a significant handicap. We expect Morrisons' shares to continue underperforming."
Tesco was one of the most-discussed blue-chip shares of 2012. The company's January trading statement last year disappointed investors and the shares fell as low as 300p.
This year's statement on Christmas sales provided far more cheer. The company reported a 1.8% increase in like-for-like sales in the UK, strong growth in online sales and a new UK boss. This was Tesco's highest growth in UK retail for three years.
The news that Tesco may be on the way to recovery cheered the market, with the shares rising 2.6%. This puts the shares back at their highest level since last year's calamitous warning.
Today, the shares trade on a P/E of 10.9 times consensus expectations of 32.0p in earnings per share (EPS) for 2013. The shares also come with an expected yield of 4.2% for 2013, rising to 4.4% in 2014. I think that today's statement may lead analysts to upgrade their earnings and dividend estimates for Tesco in 2013.
Sainsbury's has provided fewer reasons for investors to worry recently than any of the companies above. One reason for that has been Sainsbury's increasing UK-market share. As Tesco has slipped, Sainsbury's has been closing the gap.
Sainsbury's reported Christmas sales growth of 0.9% against last year on a like-for-like basis. This was the 32nd successive quarter of sales growth at the company. Sainsbury's online food sales growth came in at 15%, just under the 18% that Tesco reported.
At today's price, Sainsbury's shares trade at 11.1 times EPS forecasts for 2013. Dividend and earnings growth is expected to continue into next year, putting the shares on a 2014 P/E of 10.5 and a prospective yield of 5.4%.
I believe that Tesco is the most likely to rise substantially from here. The company had a good Christmas and the current valuation is undemanding. I can see the shares trading around 400p again within six months, provided the momentum in the business is maintained.
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