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Tesco will release its half year trading figures this week – can it beat the constraints of the increasingly competitive supermarket sector? The supermarket has seen its shares rally 20% already this year, and prices currently stand at 244p at time of writing. Its expected that Tesco will report earnings of 7.5p per share, which would be up 17.2% year-on-year, and a pre-tax profit of £944 million.
Brexit could have big implications for all the supermarkets – although the Benn amendment has probably extended the issue till January, supermarkets need to plan for reduced customer spending and higher import prices. This fear could well be holding back Tesco share prices, as they have performed quite well this year gaining around 20%. Its notable that price increases have stalled somewhat since May, never breaking above the current value. The expansion of budget supermarkets such as Lidl and Aldi, which recently pledged to open one new UK supermarket each week for two years, has also impacted on Tesco. The supermarket continues to post like-for-like group sales though and last year it posted operating profit of £2.2bn although that was probably boosted by external factors such as the World Cup and the exceptionally hot summer.
Tesco is a share that always divides opinions – many analysts are optimistic about its long-term growth citing its 13.5 times forward earnings and a cheap valuation as signs of its potential. Some though are a little more cautious because of the problems that Brexit could present and Tesco’s lack of a compelling plan to retain and expand its market share.
However Tesco’s results pan out, they are faring better than rival Sainsburys, which has lost 30 per cent from its share price in the past 12 months. Shares are now at 221.70p, with a forward price-to-earnings ratio of 11. Sainsburys seems to have lost its slightly ‘posh’ tag in recent years and its showing in its sales figures. Although total retail sales and grocery sales were up slightly, by 0.1% and 0.6% respectively, forecasts suggest EPS will have fallen 39% since 2014. Sainsburys has also announced a major restructuring plan which involves halting mortgage deals to Sainsburys bank customers, closing 125 stores and focusing on convenience locations in a bid to cut £500m of costs. The supermarket is also considering what to do with its existing mortgage deals, potentially selling them on and it has stated it will not inject any more capital into its banking arm. So, is Sainsburys in freefall or should investors consider snapping up a bargain? Some analysts see the restructuring strategy, along with the supermarket’s success in creating a robust online presence, as a promising sign in terms of recovery. Others are more cautious, though, with most maintaining a hold rating and many stressing that it will take a long time to reposition the supermarket chain in the right direction.
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