Tesco, Sainsbury and Morrison update.

Next week is a big week for the three big food retailers in the FTSE100.  All three of Tesco, Sainsbury and Morrison are due to report updates, telling us how things went over the Christmas period. All three have a lot to gain and potentially lose depending on what they report.

It has been approximately a year since Tesco reported its UK profit warning that resulted in a share slump of around 20% in a day.  Having almost touched a price of 300p over the summer, the share price has been in recovery mode on the back of a huge investment in its UK operations and its recent announcement that it is to look again at the loss making US operation Fresh and Easy. It is expected that Tesco will either scale this down massively, take on a US partner or more likely sell up completely. The market is probably looking for a further announcement on this when the company reports on 10th January. As the share price has been going up recently the good news may already be in the price, but don't be surprised if there is a further up-rating should it be announced that they are pulling out of the US. If that is also accompanied by an improvement in its UK results, then market sentiment of the good variety may suddenly be with Tesco.

Sainsbury and Morrison's are fighting different battles. Sainsbury have been performing well of late taking market share from others. It has been questioned whether they can keep this up. Morrison's on the other hand has been in the city doghouse of late, losing market share, its lack of web presence and convenience stores suddenly being seen by the market as a big negative. 

"It appears the established 2012 podium lineup (Waitrose and the discounters Aldi and Lidl) stretched their lead, but the biggest slowdown may have come at Sainsbury," said Oriel analyst Jonathan Pritchard, helping send shares in the UK's third largest grocer down 9.1p to 336p, a fall of more than 2%.

A note entitled A Tough Christmas from Morrisons house broker Jeffries also knocked confidence in the Bradford-based grocer, which finished down 2% at 257.4p. James Grzinic, of Jeffries, predicted Morrisons boss Dalton Philips would reveal a 2.8% drop in like-for-like sales for the six weeks to 30 December on Monday. Morrisons, which does not yet have a grocery website, is being left behind as the rock bottom prices offered by the discounters steal its traditional no frills formula.

"We expect Morrisons to kick off the January trading season in a weak manner," said Grzinic. "We expect hard discounters to have experienced a disproportionate improvement in market share over Christmas, particularly in the north of England. Secondly, more affluent consumers' migration to online shopping seems to have accelerated over the festive season."

http://www.equities.com/news/headline-story?dt=2013-01-03&val=887334&cat=goods

So, If Sainsbury and Morrison disappoint next week there could easily be more share price weakness. Sainsbury have had a good run on the back of improving results up to Christmas, it might be their turn to lose some of those gains if results are worse than expected.

Morrison is the difficult one to judge.  The market isn't really expecting much and results are expected to be relatively weak. If they do better than expected the shares could bounce from here, but a really bad announcement could easily see the company being given a dose of the Tesco treatment, perhaps not 20%, but 5-10% fall could easily happen with the company currently out of favour with the city. Given the company's own broker appears to be preparing the markets for disappointment, the news is unlikely to be good.

On the plus side, all three pay good dividends and that isn't likely to change next week. In fact, share price weakness could ultimately present a buying opportunity to dividend seekers as a weak price means you can buy more shares and get a bigger slice of the dividend. This kind of strategy is ok provided you are confident that any fundamental weakness in the company is likely to be a blip in the growth story rather than a sign of decline. All three of Tesco, Sainsbury and Morrison still have a lot going for them regardless of whatever they announce next week.