Tesco and Sainsbury’s will go head-to-head this week when the supermarket giants present figures from a tricky summer trading period.
Tesco’s £500 million price cutting campaign has been hailed as a boost for under-pressure households, but in the City it is also being seen as a signal that the supermarket retailer wants to “get its mojo back”.
Interim results on Wednesday are expected to reveal that UK like-for-like sales excluding fuel and VAT fell 1.2 per cent in Tesco’s second quarter, as shoppers benefited from fierce competition among rival supermarket and discount chains.
The decline in sales, which would represent a deterioration on the 0.7 per cent fall in the previous quarter, comes despite British Retail Consortium figures showing inflation running at more than 5 per cent in recent months.
Matthew Truman, an analyst at JP Morgan Cazenove, said Tesco’s latest price offensive involving 3,000 products, was part of a drive to help the group “get its mojo back” in the UK.
Tesco’s share of the grocery market slipped to 30.4 per cent from 30.8 per cent in the three months to September 4, while Sainsbury’s and Morrisons saw slight gains.
Dave McCarthy, an analyst at Evolution Securities, said the Big Price Drop is the biggest admission yet that Tesco’s UK business faces “severe issues”.
He believes the price cuts are a step in the right direction but are “underwhelming” and Tesco’s competition will be breathing a sigh of relief.
He added: “We suspect that unless Tesco cuts prices further, we will not see much impact once things have settled down and that Tesco will return to trend.”
Despite the pressure, Tesco is still expected to report profits as it benefits from growth in countries including Korea, Thailand, and China.
The only blot on its positive overseas story is the US, where it hopes to break even by the second half of the 2012/2013 financial year, and Japan, where it recently announced it is exiting.
Tesco’s push into providing mortgages and current accounts, originally due to be launched this autumn, is expected to be delayed until next year while it makes sure its new systems work properly.
Christopher Hogbin, analyst at Bernstein Research, expects group sales to increase by 8 per cent to £32.2 billion in the half-year and pre-tax profits to rise 8.5 per cent to £1.7 billion.
In contrast to Tesco, Sainsbury’s is set to reveal its recent solid growth has continued when it updates on the same day.
The UK’s third biggest supermarket chain is expected to report a 1.5 per cent increase in like-for-like sales excluding fuel in its second quarter, down from 1.9 per cent previously. Its figures include VAT, whereas Tesco’s do not.
Sainsbury’s has outperformed rivals Tesco and Asda as its feed a family for a week for £50 campaign struck a chord with consumers.
Industry figures from Kantar Worldpanel show that Sainsbury’s sales grew 4.8 per cent in the three months to September 4, giving it a 16.1 per cent share of the grocery market.
The chain has recently dropped its Try Something New Today strapline in favour of Live Well For Less as part of a drive to be seen as better value for money by consumers.
It is also trialling a price matching scheme in several stores in Northern Ireland.
Its figures are expected to have been boosted by running promotions on fuel during the period, which helped encourage more shoppers to drive to its stores.
Sainsbury’s has also been aggressively expanding its non-food ranges to help it catch up with rivals Tesco and Asda. Its TU clothing range is expected to have benefited from a recent advertising push.
However, Dave McCarthy of Evolution Securities, warned that Sainsbury’s may be impacted by Tesco’s Big Price Drop.
He said: “With the thinnest margins in the sector and the weakest cashflow, Sainsbury’s is the most vulnerable to any increased price activity.”
Shares in Halfords have nearly halved in value in the past year after the retailer was hit by the downturn in consumer spending and supermarkets muscled in on its bike sales.
Demand for bikes has been boosted in recent years as the soaring cost of petrol encourages people to cycle to work.
And the success of Britain’s top cyclists, including Mark Cavendish in the Tour de France and recent world championships, has also helped lift demand for racing bikes, including those under Halfords’s own Boardman range.
But Halfords’s share of the market has come under pressure from strong competition from the likes of Tesco and Asda and availability problems after it suffered disruption to its supply chain.
Halfords has been fighting back in recent months after it introduced new cheaper ranges, such as its Trax bikes, and put on more special offers.
Its bike sales saw 11.5 per cent growth in its last update, with premium brands Boardman, Voodoo and Carrera seeing strong growth. However, this was at the expense of its profit margins amid strong competition.
The retailer, which has 464 stores in the UK and Ireland, reported a decline in like-for-like sales of 1.1 per cent in the 13 weeks to July 1 as sales of car enhancement and maintenance equipment fell as customers drove less and looked to save on costs.
It has also been hit by a downturn in demand for technology such as sat-navs.
The company’s latest trading update, on Thursday, is unlikely to provide too much in the way of cheer, with Jonathan Pritchard of Oriel Securities warning the statement is “likely to be poor and breed lower consensus forecasts”.
The Nationwide Autocentres business, which it bought last year, is expected to have benefited from an advertising push but overall Mr Pritchard expects pre-tax profits for the year to March to decline 23 per cent to £97 million.
It was only a year ago that Halfords was riding high and was seen as a resilient play in the face of the financial downturn.
Shares in the company peaked at 560p last summer but since downgrading its profit forecasts the share price has nearly halved.
Fashion retailer Ted Baker has bucked some of the gloom on the high street after sales jumped by 15% in the first 19 weeks of its financial year to June.
A 9.4 per cent increase in retail sales drove that rise, allied to a 42% jump in wholesale income, though this was exceptional and is expected to slow over the remainder of the year.
New stores in Manchester, Paris and Hong Kong have opened this year with new concessions in the US, Spain and Portugal.
Analysts said the sales strength, especially in the second quarter, had been a pleasant surprise and, stripping out the impact of new space like-for-like sales were up by about 5 per cent despite a tough comparative period the previous year.
As well as expanding its outlets, Ted Baker, which does not advertise, has also branched out from a pure menswear label when it opened in Glasgow in 1987 to a full lifestyle brand selling womenswear, accessories, fragrances, footwear, eyewear and watches.
Ray Kelvin, founder and chief executive, attributed the recent good performance to its new collections and it expansion into new territories.
Other top-end brand owners, such as Burberry and Mulberry, have also done well as the luxury end of the market has proved to be more resilient in the face of the current economic problems.
Andrew Wade, an analyst at Numis, raised his profit forecast for Ted Baker for the full year to next January to about £27 million following the June update.
For the half year figures released on Thursday, he expects profits to rise to £8.1 million from £7.5 million.
New stores planned for the UK, New Zealand, China and America will help the second half, though Mr Wade said there may be an increase in pressure from competitors, particularly in department store concessions.
The prospect of a double-dip recession has sent builders’ merchant Wolseley’s share price back down to levels last seen in 2009.
That was when there were fears for the debt-laden firm’s future due to the collapse in construction markets in the UK and US during the credit crunch.
It has been a painful recovery process for the plumbing supplies giant since then, with tens of thousands of job cuts, an emergency cash call and a swathe of businesses either closed or sold. The group has also switched its tax base to Switzerland.
Analysts say while a double-dip recession would pose a problem, financially Wolseley is in much better shape this time around.
And while it is still heavily geared to the housing and construction markets in the UK, France and the US, which account for nearly 80% of revenues, the global market has still not fully recovered from the 2009 slump and any downturn, if it occurs, would be less severe.
The sale of the Build Center business in the UK and the Brossette division in France for a combined total of £310 million earlier this year has also left it nearly free of debt.
That compares with borrowings of nearly £3 billion in the aftermath of the 2008 credit crunch, which hit Wolseley after a prolonged, debt-funded acquisition spree.
Chief executive Ian Meakins, who took over in 2009, has also largely completed the pruning of the businesses he inherited, though Bathstore, the UK’s largest bathrooms retailer with 160 stores, is still with the group after a possible sale reportedly fell through earlier this year as trading conditions got tougher.
This week’s annual figures, published on Tuesday, are expected to show the benefits of the pruning, with consensus trading profits showing a jump to £608 million from £450 million.
Sales will rise by about 3 per cent to £13.6 billion, according to consensus estimates, but how current trading is being affected by the economic woes in the US and Europe will attract most attention.
Analysts are still expecting like-for-like sales growth of between 2 per cent and 3 per cent in 2012 if conditions stay roughly as they are now, but most of those estimates assume there is not another severe global downturn.