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Are Tesco and Morrisons fighting back against Aldi and Lidl?

After Next’s bad trading update last week, which hit clothing retailers, it is the turn of Britain’s supermarkets to unveil their performance over Christmas.

CFDs are a leveraged product and can result in losses that exceed deposits. Trading CFDs may not be suitable for everyone, so please ensure you fully understand the risks and take care to manage your exposure.
Source: Bloomberg

For the British public, the main topic of discussion last week was whether it was appropriate or not to wear pyjamas to the supermarket. For investors, however, the sector is in focus for a very different reason. The all-important Christmas trading updates arrive this week, and are likely to prove crucial for share price direction, after twelve months that saw interesting developments among the big names, and some surprising share price performances.

From the ‘mood music’ coming out of the sector in the last few days, it looks like the established names such as Tesco did well versus the upstart German discount rivals. It would appear that Aldi and Lidl came under pressure due to the poor appearance of their stores, reminding investors that such apparently mundane elements as store image are important for shoppers (a fact that Tesco lost sight of for many years, and only rediscovered over the past two). Whether this is the beginning of a broader trend remains to be seen, and it may the case that this is more of a blip, with shoppers perhaps opting to spend more at the established firms.

Retailers generally can look back on a good few months, consumer spending having held up well since the EU referendum vote. However, the weakness of sterling is beginning to make itself felt, pushing up import costs. This factor will be worth watching in 2017 too, given that the prime minister's recent interview about leaving the EU in its entirety has resulted in another drop for sterling versus the dollar and the euro. Other cost pressures should be watched too, as the national minimum wage, higher business rates and increasing utility costs start to hit margins.

A Reuters poll of analysts expect Tesco to see like-for-like (LFL) sales growth of 1.25% for the three months to 26 November, and up to 1.5% for the Christmas period. Meanwhile, Morrisons is forecast to see underlying sales growth of 1.1% for the nine weeks to 1 January, and Sainsbury’s expected to see a drop of 0.8% for the three months to 7 January.

In share price performance, 2016 saw Tesco rise by 38% and Morrisons surge by an incredible 55%. Sainsbury’s, meanwhile, fell by 2.6%, with the real impact of the Argos deal yet to be felt in shareholder sentiment. With such a good performance from Tesco and Morrisons, some retracement in the share price may be expected, even if the trend holds up. Meanwhile, Sainsbury’s shareholders will be aiming for some good news in its update that helps to close the gap in share price performance over the past year.

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CFDs are a leveraged products. CFD trading may not be suitable for everyone and can result in losses that exceed your initial deposit, so please ensure that you fully understand the risks involved.

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