British retailers have begun to turn the corner after “falling asleep at the wheel” in 2014, resulting in damage for shareholders, according to Shore Capital analysts Clive Black and Darren Shirley.
“Earnings and returns collapsed, assets written down and debt mushroomed,” they claimed.
The retail market last year was a “dangerous mix” of negative volumes, share loss, gross margin investment, negative operational gearing and cash outflows, they added.
The big four paid a “great price” for misreading the market and misunderstanding the consumer, while discounters Aldi and Lidl and premium retailers Waitrose and Marks & Spencer started to gain material share, Shore Capital said.
Heavy lifting has started
But “heavy lifting” has now started to take place to improve the sector’s fortunes, the analysts claimed.
“There are still challenges facing the major British supermarkets; the discounters, deflation, rebalancing to mention just three,” they said.
“However, we feel that heavy lifting has been undertaken and that better strategies are being applied by superior management.
Empire strikes back
- Volumes are improving
- Gross margins stabilising
- Capital expenditure cut
- Better management strategies
“With favourable comparatives in tow, a rising population and economic growth could drive sustained improvement in sales densities and cash generation, progress that could have a ‘Bookeresque’ feel in time. Indeed, returns may even rise with asset values bolstered.”
Of the big four supermarkets, Shore Capital was most optimistic about the future of Morrisons and Tesco.
Morrisons and Tesco
“We prefer Morrisons due to its freehold and pension position plus especially favourable comparatives,” they said.
“We also like Dave Lewis’s immediate strategy for Tesco albeit near-term benefits are priced in to us; will there yet be a rights issue?”
Since Morrisons new boss David Potts joined the troubled retailer last month he has instigated a number of changes to the business. These have ranged from cost-cutting measures, widespread management cuts and investing £1M of his own money in the business, to store cleaning and an updated playlist.
However, Shore Capital was much more concerned about Sainsbury as it was vulnerable to an improvement in the performance of Tesco.
“We worry about Sainsbury as it appears particularly exposed to recovering competitors and management guidance is very cautious,” Black and Shirley claimed.
Ocado, on the other hand, promises so much but delivers so little, they added.