Investment View: Keep a watching brief on those squeezed middle supermarkets
Has Justin King done a Sir Terry Leahy and announced his departure at the perfect time, leaving his successor to take the blame for a precipitous fall to come? Erm, no. At least probably no.
Nick Bubb, the long-time retail analyst and writer of "the Daily Retailer", sums it up well when he says Sir Tel left Tesco in "a shocking state, with the UK bled dry to finance the foolish escapade in the US".
He doesn't think Mr King has "done a Leahy" by handing his successor a hospital pass. Au contraire: "Justin is leaving with the business in pretty good shape, although everybody can see that the industry is getting tougher."
It's that latter point that investors need to take on board. It's true that the economy is getting better, and we may even start to hear a few more coins jangling in consumers' pockets before too long. But it'll only be coins and consumer confidence remains muted.
It's also true that the fissure that has opened in the grocery sector – with Waitrose winning at the top, the discounters cleaning up below and a hole opening underneath most of those in the middle – doesn't show any signs of closing soon.
Aldi and Lidl are hard habits to break once a shopper has got into them. Mr Bubb reports on a breakfast hosted by John Rogers, Sainsbury's well regarded finance director, when 30 per cent of an upscale audience admitted to visiting the discounters. Asda's ad asks "Why pay more?" Well, quite, so I'm off to Aldi, thanks guys. The German sensation has even indulged in Christmas ads while offering upscale products such as fancy booze at sharp discounts. The formula is working, luring the cash rich as well as the cash strapped.
Despite this, there is a segment that will gladly pay for the quality, service and especially the cachet that shopping at Waitrose offers: hey, we're doing well, we can afford to buy our groceries there. Must get some of those organic kumquats in and a free range, corn-fed chicken for our dinner party. Darling, do remember to leave the jute bags with the logo on in the hall, would you?
Of course, Sainsbury's has capitalised on a bit of that too, with similarly ethically sourced products, and service with a smile. Perhaps it's not quite up to Waitrose standards on service, but its stores are much, much friendlier than Tesco's, and the latter still hasn't caught up with how important that can be.
My experience of all four could serve as a metaphor: at Waitrose they did the shopping for me while I sat; at Sainsbury's, a mobility scooter was on hand from a smiling security guard; at Aldi, well, the store was small; and Tesco? I was once left in considerable discomfort while they debated what to do with me. Every little helps? "Little help" would be more accurate. Tesco, it seems, doesn't yet really know what to do. Its sales are falling fast, its turnaround programme is proving slow to show results. Even the overseas business has its problems.
Still, from an investment perspective I've kept faith with Tesco for quite some time. I regret that now, but it remains a juggernaut. Surely it'll come good soon, won't it? Won't it?
Well, after falling for a year, the shares are now looking very cheap at 10.4 times earnings for the forthcoming full-year earnings (the year ends 28 February) and with a respectable 4.6 per cent yield.
I know I've said this before, but at that price, buy. However, it's a trading buy. Be prepared to bail out for a quick profit. Your patience should rightly be wearing thin.
Sainsbury's? I agree with Mr Bubb. Mr King has not done a Sir Terry. Having dipped recently, the shares are cheap at 10.8 times earnings with an impressive forecast yield of 5 per cent (the year ends 31 March). These are shares to buy now and put away, in contrast to Tesco.
Morrisons? The worst performer of the three over the year. Morrisons' shares trade on 10.3 times forecast earnings for the year to 31 January 2015, and yield just over 5 per cent. Activist investors want it to sell off stores and return cash to them. Bad move.
But they're circling, because the company isn't in a good place, and after the recent poor earnings I wouldn't want to take a punt on any quick recovery in the share price. Avoid. Its big hope is the tie-up with Ocado, which is rolling out an online grocery service for Morrisons (one of many holes in the latter's offering).
Ocado's shares have performed stunningly over the last year – up over 400 per cent. Congratulations if you got in. Now follow its co-founder Jason Gissing and pocket your winnings.
The Morrisons deal may yield some results for it, but the loss-making online retailer's shares look fully priced to me right now.
There are grounds for optimism but this is reflected in the price.
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