The FTSE 100 has climbed to a new record high today, boosted by a rally in supermarket stocks after retailer Morrisons (MRW) reported its best Christmas sales in seven years.
The blue-chip index, which is made up of the UK’s largest 100 companies, touched a fresh record intraday high, up to 7,266 at midday and climbing higher throughout the afternoon to 7,277.
Morrisons reported a 2.9% rise in like-for-like sales excluding fuel in the nine weeks to January 1. Total sales were also up 2% despite the negative impact of store closures. The retailer added that it now expects in full-year underlying pre-tax profit to be ahead of consensus estimates, in the range of £330 to £340 million. The shares jumped to a two-year high on the results.
"This Christmas we made further improvements to the customer shopping trip. We stocked more of what our customers wanted to buy, more tills were open more often, and product availability improved as over half of sales went through our new ordering system. Both like-for-like and total sales grew, which was very encouraging,” said David Potts, chief executive of Morrisons.
Major retailers in the UK have posted share price gains as the market digested the news of Morrisons’ strong sales over the Christmas period. Morrisons gained 3.4% to 245p while Tesco (TSCO) was up 5.4% to 211p, at the end of the trading day. Shares of another grocer Sainsbury (SBRY) were also up 1.7% to 259p.
Chris Beauchamp, chief market analyst at IG Group the online trading platform commented on the rise of supermarket stocks: “Tesco has rallied in sympathy, with investors evidently thinking that if Morrisons can turn in a good performance, then the UK’s biggest supermarket will also have had a good festive period.”
Supermarket Stocks among Best Performers in 2016
Morrisons and Tesco both delivered impressive share price performances for 2016, gaining 58% and 38.4% respectively. Morrisons was listed among top 10 best performing stocks of 2016 according to data from Morningstar Direct. Another grocer Sainsbury however fell short, posting only a slight 0.9% gain in 2016.
Morrisons is the fourth-largest U.K. supermarket chain with 10.8% share and strong market positions in the north of England and Scotland, said Morningstar equity analyst Adam Kindreich. The firm has good balance sheet and cash flow management. Working capital has been squeezed, selective store property sold off and capital spending held in check, said Kindreich. Kindreich is cautious on the prospects for the grocer’s further recovery as it is squeezed between the hard discounters and large mainstream supermarket operators.
Kindreich predicts Morrisons will struggle to rebuild profitability and value destruction looks to be a more permanent feature of its business. The stock is rated two-star by analysts, meaning analysts think it is trading above their fair estimate for the share price.
Tesco remains a strong operator which competes in multiple channels, and it should be able to leverage its reputation to retain its core customers as their shopping habits change, said Kindreich. He believes Tesco's scale allows the firm to operate more efficiently than many competitors, and its convenient locations and loyalty program should continue to drive traffic. However, analysts do not have enough confidence in Tesco's ability to sustain excess returns over the long term.
Kendreich added that international growth opportunities could also drive profitability higher as Tesco's stores mature and if revenue reaches critical mass for leveraging fixed costs. Tesco’s ratings and fair value estimate remain under review, according to Morningstar analysts.
Sainsbury reported disappointing results in September 2016 as the supermarket finalised the acquisition of Argos owner Home Retail Group.
“Sainsbury completed the purchase of Home Retail Group on September 2nd, 2016. It is still early days, and it remains to be seen what impact this might have in strengthening the online offer and enabling Sainsbury to capture a larger share of the significant non-food market,” said Kindreich.
“Same-store sales fell 1.1% excluding fuel, which shows no improvement on previous periods. The weakness in sales was brought about by price cuts, while volumes are growing,” said Kindreich.
