Tesco, M&S seen as Christmas winners before UK spending squeeze hits

By James Davey

LONDON (Reuters) -Britain’s biggest retailer Tesco and food and clothing group Marks & Spencer are expected to emerge as Christmas winners from a raft of market updates as investors fret over a looming squeeze on consumer spending.

The global industry will be watching as British retailers update the market on festive demand, before their U.S. peers report in the coming weeks on a Christmas period hit by the rapid spread of Omicron and chronic supply chain disruption.

In the United States brokerages have forecast muted holiday sales after early signs of weak demand.

In Britain, where Omicron kept shoppers at home, retailers in clothing and general goods were largely reliant on their online channels, while demand for food and drink from supermarkets held up as restaurants and bars lay deserted.

Three major UK listed retailers have reported so far – clothing chain Next, discount retailer B&M and baker and fast food chain Greggs. All upgraded their full-year profit outlooks but also cautioned on ongoing global supply chain disruption and inflationary pressures.

British consumers are about to be hit by one of the tightest squeezes on spending in decades, with energy prices, food inflation, mortgage costs and taxes all due to jump in 2022, leaving retailers looking at a much tougher environment.

As the pandemic eases, they also risk losing out if consumers start to spend on holidays and other leisure pursuits.

Early indications of weakness hit fast fashion groups like ASOS and Boohoo badly last year.

For now, Next, a supplier of mid-priced clothes to families across Britain, said it had been surprised by the strength of demand in the final three months of the year.

WINNERS

For Christmas, expectations are high for Tesco after industry data published on Wednesday showed it outperformed its major rivals – Sainsbury’s, Asda and Morrisons – achieving its highest grocery market share since January 2018.

M&S, Britain’s most famous stores group which is recovering from a decade of decline, is also anticipated to have performed well after data from market researcher Nielsen last month showed it was the country’s fastest growing food retailer heading into the festive season.

“M&S had remarkable momentum in-store during Q3 and we see little to believe that this did not continue at Christmas time,” said Shore Capital analyst Clive Black.

“Of the ‘Big Four’ (grocers) we believe that Tesco UK, with strong availability, standards and growing (loyalty) Clubcard penetration, will win – both M&S and Tesco could guide (profits) higher.”

The 138-year-old M&S, which has already upgraded its profit outlook twice this year, will update on third quarter to Jan. 1 trading on Thursday.

On average, analysts forecast total food sales rising 7.7% versus the same period in the 2020-21 year and up 10% versus the same period in the 2019-20 year before the pandemic began.

M&S’s clothing and homeware sales are forecast to jump 32.3% on last year, bringing them to within touching distance of levels produced in 2019.

Also on Thursday, Tesco will provide a market update that includes trading for the six weeks to Jan. 8. Analysts at Citi forecast organic sales compared with last year, when Britain was in lockdown, to be either flat or incrementally higher.

Sainsbury’s, Britain’s second largest supermarket group, will update on its trading on Wednesday.

ASOS will also update the market on Thursday, showing whether any of the supply chain problems that have hit its shares have eased.

Electricals retailer Currys will indicate demand for its goods on Friday, having warned in December of a softer market.

(Reporting by James Davey; editing by Kate Holton and David Evans)

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