How Sales Growth At Tesco PLC Could Herald A New Spring For WM Morrison PLC & J Sainsbury plc

According to research from Kantar Worldpanel, a firm that describes itself as the world leader in consumer knowledge and insights based on continuous consumer panels, Tesco (LSE: TSCO) returned to sales growth during the 12 weeks ending 1 February 2015.

Growth? Are you sure?

Yes, it’s true. For the first time since January 2014, Tesco increased its sales — by 0.3% compared to this time last year. That’s not by much, but is better than the relentless slide in numbers we’ve become used to. Kantar Worldpanel arrives at its conclusions by “combining market monitoring, advanced analytics and tailored market research solutions”.

Such early warning of Tesco finding a sales bottom is good news. With luck, Tesco will confirm its green shoots of turnaround success with its next trading update. The tantalising question for us investors is whether now might be a good time to jump back into the sector if we haven’t taken a leap of faith already. Tesco is making the news today, but WM Morrison Supermarket‘s (LSE: MRW) share price looks perky on the read-across. Let’s look at both firms along with J. Sainsbury (LSE: SBRY).

Is there value in the sector?

Investing in the supermarket sector still feels risky to me. Those once-dependable cash-generating firms that sold us our groceries were long prized for their defensive characteristics — low in excitement, but reliable dividend deliverers backed by loyal, repeat-purchasing customers. Not any more. The business landscape is changing fast as discounting competitors re-write the rulebook.

Well-known chains such as Tesco, Morrisons and Sainsbury’s face a fight for survival as they air-run after finding the rug pulled from under their business models. Yes, they are all pitching into turnaround programmes, but I think it unlikely we’ll see a return to past glories. New glories, maybe, but first they need to develop  new business lines, methods, models and practices. To me, new growth seems likely to come from new things, so we are looking at  jam-tomorrow, traditional growth propositions with the supermarkets rather than turnarounds based on existing, albeit streamlined, methods.

This is how the numbers look:

When it comes to turnarounds, the sales figures don’t matter as much as the profit and cash flow figures. They do matter, but not as much in the first place. The table shows a lower price-to earnings multiple for J Sainsbury and that’s a reflection on the firms better recent performance on profits — Tesco and Morrison saw their profits slip further than Sainsbury.

Ignoring profits for a moment, Sainsbury looks the best value on the price-to-sales measure. If Sainsbury can drive its profits back up, and that’s a big ‘if’, the value case could be compelling. However, that’s only a cursory consideration of the immediate numbers and we should be careful to examine the whole picture before arriving at a view on these firms’ prospects.

Is Spring around the corner for the sector?

Kantar Wordpanel sounds a warning: Tesco lost UK market share, and discounters Aldi and Lidl, and high-end supermarket Waitrose, saw rises in sales and market share over the period under consideration. Nevertheless, Tesco’s efforts to sort itself out under new chief executive Dave Lewis attracted an additional 236,000 shoppers into its stores during the last 12 weeks, they say.

I can’t help thinking that’s small fry, though. We mustn’t forget that Tesco shed 0.2% of its market share last year in what seems like a structural longer-term trend in the market that may continue to hamper the forward prospects of the London-listed supermarkets over the years ahead. I’m not so sure that we see a new Spring as much as a fleeting beam of sunlight escaping the clouds. That said, I’m open to being convinced otherwise by the supermarkets.