A Preview of Tesco and Sainsbury’s trading updates

Preliminary reports suggest Britons spent at least as much as last year over the holidays, but that doesn't mean listed grocers will see good results.

Consumers in pursuit of bargains due to inflation

With the highest inflation in decades and the UK , it's no wonder investors are worried about sales at major supermarkets. The trend has been for consumers to save on household items and clothes and to keep funds available for essential items such as groceries. The issue for most major supermarket chains is that groceries tend to be the lower-margin products on offer, and some even make the majority of their income from non-grocery sales. 

The focus has been on inventories because the major retailers have been forced to discount their higher-margin items to get them off the shelves. This has led to margin compression. The other factor is changing habits. Shoppers have been moving away from high-priced high street locations in favour of retail parks, where discounts are more abundant. Under this scenario, the strongest growth through Dec 25. 

Big grocers sacrifice margins for market share

Tesco still remains the largest grocer in the UK and is this quarter, lagging behind Sainsbury's projected 6.8% LFL sales growth. Both expect slower increases in clothing sales because of the warmer winter despite the bout of cold weather at the start of the month.

Focus is likely to be on any comments about consumer behaviour. Tesco and Sainsbury's are seen sacrificing margins to defend market share. Kantar's latest report showed Sainsbury's sales grew by 6.2% in the three months to December, below the 7.6% growth in the segment. Tesco's sales performed slightly worse at 6.0%. Investors are likely to be particularly keen on Tesco's operating margin guidance after it cut its outlook back in October.

Tesco's price action lags behind Sainsbury's

Tesco and Sainsbury's stocks bottomed out in October last year and have been moving in tandem, up around 21% since. In fact, they mirror one another in price action, as they have both exited a consolidation phase: TSCO departed a pennant formation, whereas SBRY a flag. However, TSCO lags behind, as it saw a deeper correction back in November. Meanwhile, Sainsbury's has accelerated to a 10-month high instead, compared to a 4-month high on Tesco.

Source: Barchart

Key takeaways

UK major supermarkets, Tesco and Sainsbury's, will provide a trading update this week. Both face challenges due to high inflation and an official recession as consumers prioritise spending on essential items, which results in discount retailers earning increased market share. 

Tesco and Sainsbury's are sacrificing margins to defend market share despite looking to report LFL sales growth of 4.1% and 6.8%, respectively. Investors are paying attention to Tesco's operating margin guidance, which was lowered in October, while Sainsbury's stock is outperforming.