The British superstore operators have been a virtual no-go area for investors for some years. Largely misguided management steered businesses away from their customers, damaging their balance sheets in the process, and opening opportunities for others, particularly the limited assortment discounters (LADs). The collateral damage that ensued was a litany of woe; collapsed earnings, assets written down, dividends waived and share prices under pressure.
While all this is so, are we in a situation where not only can we see the tunnel but shards of light at the end of it? Three things come to mind in this respect that may just support this thesis.
Firstly, new management is in place and taking the right decisions for their customers within the context of what is right for the long term. What’s right for the punters tends to be right for the business. Those decisions include a structural narrowing of the gap in fresh food prices in particular against the LADs; the last few weeks has seen Asda’s Pocket More, Morrisons’ Price Crunch and Tesco’s new fresh food farm sub-brands.
Secondly, economic rationale is to the fore, most particularly the cutting down of store openings and so capital expenditure. This is a structural decline that with a stabilisation in trade, and so improved working capital, for example, is leading to progressive cash generation and so de-leveraging. Accordingly, the solvencies of Morrisons and Tesco in particular are materially improving.
Thirdly, we have corporate activity in the sector based upon expansion with Sainsbury’s audacious, entrepreneurial and opportunistic bid for Argos, which looks like winning the day. Whilst potentially distracting, it is good to see a British supermarket associated with growth again and also being linked with entrepreneurship!
The pace of improvement is slow because these metaphorical supertankers take a long time to turn around, most particularly when they are beached! However, it looks like the boats are floating again, which gives us a spring in our step for spring time that is good news for customers, supply chains and shareholders alike.
Clive Black is head of research at Shore Capital Stockbrokers