Will Christmas dinner kill off Tesco plc?

What will the festive season say about the future of Tesco plc (LON: TSCO)?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Christmas is typically seen as a test of our top retailers, and it can provide a good barometer of fortune for our supermarkets. This year’s Yuletide could be a telling one for Tesco (LSE: TSCO), though I fear the tidings might not be good.

Good Housekeeping magazine has just published its annual survey of the cost of Christmas dinner, and it contains good news for feasting revellers — the 11 ingredients are now 10.8% cheaper than they were in 2009. But that’s not such good news for high street names like Tesco, who are facing growing competition and ever-thinner margins.

Relentless competition

This year it’s firmly down to those two interlopers Lidl and Aldi. The Christmas dinner index put Aldi firmly in the lead in the low-cost stakes, with an 8-person meal costing as little as £22.03p — notably cheaper than second-place Lidl at £24.57.

Tesco was squeezed out of third by Iceland, only managing fourth place at £28.08, just ahead of Asda at £29.68.

On its own, this survey perhaps shouldn’t be taken too seriously, but it does make me question the expectations some have for Tesco’s recovery over the next couple of years — analysts are predicting significant EPS growth, but it seems like it’s been “recovery next year” for years now.

And we’d still be looking at a forward P/E of more than 28, dropping only to around 21.5 based on 2018 predictions. I can’t, at this moment, see why Tesco should command a multiple of around twice the FTSE 100‘s long-term average, especially not with dividends still expected to be very low.

Competition hurting too?

Morrisons (LSE: MRW) is another one that could do poorly this Christmas, if the survey is anything to go by. With its dinner costing £31.12, Morrisons only managed a poor sixth place in terms of low cost, with its total price a full 40% more expensive than winner Aldi.

I remember the early days when Morrisons was expanding and capturing market share — and it was doing it by undercutting its rivals. Without a cost advantage, I really couldn’t think of any reason why I’d go there for any Christmas food shopping this year — or why I’d buy the shares.

And while Morrison is also expected to turn its fortunes around this year, we’d still be seeing earnings per share of only around half their pre-crunch levels, with the shares on a P/E of 21.

Most expensive?

At the other end of the list came Marks & Spencer (LSE: MKS) with its reassuringly expensive Christmas dinner at £49.90. I say reassuring, because higher quality food is the one thing that M&S does really well, and it’s going to be bought by shoppers who really don’t mind the cost of putting on a top spread each year.

M&S is struggling in other departments, and has repeatedly shown its inability to turn its clothing business round into growth. That means there’s a further fall in earnings on the cards this year, putting the shares on a P/E ratio of around 11.5. Dividend yields should be about 5.6%, though, albeit with cover that’s perhaps a little stretched.

But you know what? Of these three shares, M&S’s are the ones I’d be most likely to buy now.

And Christmas food shopping? I’ll be heading to a new shopping development half a mile from home that contains only two stores — Aldi and M&S Food.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Person holding magnifying glass over important document, reading the small print
Investing Articles

Just released: our top 3 small-cap stocks to consider buying in October [PREMIUM PICKS]

Small-cap shares tend to be more volatile than larger companies, so we suggest investors should look to build up a…

Read more »

Investing Articles

How I’d use an empty Stocks and Shares ISA to aim for a £1,000 monthly passive income

Here's how using a Stocks and Shares ISA really could help those of us who plan to invest for an…

Read more »

Investing Articles

This FTSE stock is up 20% and set for its best day ever! Time to buy?

This Fool takes a look at the half-year results from Burberry (LON:BRBY) to see if the struggling FTSE stock might…

Read more »

Investing Articles

This latest FTSE 100 dip could be an unmissable opportunity to pick up cut-price stocks

The FTSE 100 has pulled back with the government’s policy choices creating some negative sentiment. But this gives us a…

Read more »

A young woman sitting on a couch looking at a book in a quiet library space.
Investing Articles

As the WH Smith share price falls 4% on annual results, is it still worth considering?

WH Smith took a hit after this morning’s results left shareholders unimpressed. With the share price down 4%, Mark Hartley…

Read more »

Investing Articles

The Aviva share price just jumped 4.5% but still yields 7.02%! Time to buy?

A positive set of results has put fresh life into the Aviva share price. Harvey Jones says it offers bags…

Read more »

Investing Articles

Can a €500m buyback kickstart the Vodafone share price?

The Vodafone share price has been a loser for investors in recent years, and the dividend has been cut. We…

Read more »

Frustrated young white male looking disconsolate while sat on his sofa holding a beer
Growth Shares

3 mistakes I now avoid when choosing which growth stocks to buy

Jon Smith runs through some of the lessons he's learnt the hard way over the years about what to look…

Read more »