As Europe crawls back to work after a holiday period laced with labor unrest, sky-high inflation and economic gloom, the British consumer is spreading some welcome cheer. Investors in UK retailers were heartened by the trickle of Christmas trading updates from Next Plc and B&M European Value Retail SA on Thursday, sending sector stocks higher, as they await dispatches from J Sainsbury Plc, Tesco Plc, Asos Plc and Marks & Spencer Group Plc next week.
(Bloomberg) — As Europe crawls back to work after a holiday period laced with labor unrest, sky-high inflation and economic gloom, the British consumer is spreading some welcome cheer. Investors in UK retailers were heartened by the trickle of Christmas trading updates from Next Plc and B&M European Value Retail SA on Thursday, sending sector stocks higher, as they await dispatches from J Sainsbury Plc, Tesco Plc, Asos Plc and Marks & Spencer Group Plc next week.
Online fashion retailer Asos was the UK’s worst-performing stock in 2022, plunging 78% as cash-strapped Britons cut spending on clothes and the company struggles with soaring costs and rising debt. While Sainsbury, Tesco and M&S also underperformed, all four have rebounded in the first trading days of 2023, thanks in part to the uplifting peer reports this week. Whether shoppers’ ebullience carries on into the new year is another question. Analysts expect a 25% decline in M&S’s adjusted pretax earnings in the year through March, and predict a decline of more than 50% in Asos’s annual earnings for its current fiscal year, according to data compiled by Bloomberg.
Homebuilders Persimmon Plc and Taylor Wimpey Plc have also started the year on the front foot, outperforming the FTSE 100 Index. Still, questions on how much current valuations are in sync with developments on the housing market remain. Their business updates on Thursday and Friday may offer more clarity. UK house prices fell for a fourth month in December, one of the nation’s biggest mortgage lenders said on Friday, adding to evidence that a more protracted downturn may be under way.
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Highlights to look for next week:
(All trading updates are expected at 7:00 a.m. London time)
Wednesday: Sainsbury’s (SBRY LN) third-quarter results come after robust-looking Christmas revenue at Britain’s No. 2 grocer, with Kantar data showing an increase of 6.2% in the 12 weeks to Dec. 25, compared with overall UK grocery sales growth of 7.6% in the period. Still, traditional supermarkets like Sainsbury are likely “sacrificing” profit margin to keep prices low to fend off German discounters Aldi and Lidl, said Bloomberg Intelligence analysts Charles Allen and Ignacio Canals Polo. Comments on consumer behavior in the new year will be key, as will any potential change to the company’s adjusted pretax profit guidance for the full year, which it has forecast in the range of £630 million ($758 million) to £690 million. Analyst estimates compiled by Bloomberg point to earnings coming in at the mid-point of £659 million.
Thursday: Tesco’s (TSCO LN) sales grew 6% in the period tracked by Kantar, in line with Sainsbury’s, but outpaced by Aldi and Lidl — who notched gains of about 27% and 24%. The UK market leader’s retail adjusted operating profit guidance for the year is now in focus when it reports third-quarter results before the open. Tesco trimmed the forecast in October to between £2.4 billion and £2.5 billion, cutting the upper end of a previous range that went as high as £2.6 billion. Any update will come after the supermarket this week announced a price freeze on more than 1,000 products until April 10, extending a previous price lock which ran from October to the start of 2023.
- Marks & Spencer’s (MKS LN) Christmas trading update should shed more light on whether the “sharper” positioning of its upscale food business propped up profit margins. But, even with a more aggressive pricing policy, there’s a risk to overall spending this year as “consumers have to make choices,” according to BI’s Allen. Investors will also pay attention to any strategic comments M&S may make with regard to its joint venture with Ocado Group Plc. A full integration of Ocado’s online grocery business with M&S stores could create a “viable new mainstream supermarket business, with a strong own-brand core,” Allen says, adding that such a move would need M&S to take 100% ownership of the JV, which doesn’t look imminent.
- Asos (ASC LN), due to give a first-quarter trading statement, has been hit by a “perfect storm of difficult pandemic comparisons, inflation and rising interest rates,” says BI’s Tatiana Lisitsina. Analysts expect Asos’s full-year adjusted pretax profit to drop by 58% to £9 million. Investors will also keep an eye on Asos’s talks with lenders, which it will need to take up again this year as recently extended terms on a £350 million revolving credit facility expire in 2024.
- Persimmon’s (PSN LN) update will be closely watched for any impact on selling prices in the final quarter of 2022, as well as more detail on its outlook for this year. The company is focused on first-time buyers, who have been hurt more than home movers by higher interest rates and a cost-of-living crisis, said BI’s Iwona Hovenko and Susan Munden. This, together with build-cost inflation, may lead to narrower margins at Persimmon — but they’re still “peer leading,” the analysts add.
Friday: Taylor Wimpey’s (TW/ LN) trading update will round out the week. The company was among the UK homebuilders flashing warning signs about the country’s housing market last year, with the cancellation rate for Taylor Wimpey’s homes rising to 24% in the second half of 2022 from 14% a year earlier. The key catalysts to watch this year include the Bank of England’s benchmark rate peaking closer to 4% than 5% and the appeal of new homes rising on better energy efficiency, said BI’s Iwona Hovenko.
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