Storm clouds may be gathering over the UK economy, but in the meantime these two household British names have been busy making hay while the sun shines. Unfortunately, investors have chosen to slam both stocks in early trade amid the raft of economic challenges to come, while taking some profits after their strong recent rally.
1. Marks & Spencer
A resurgent M&S (LON:MKS) banished any potential winter blues with a blistering festive performance which saw new records being set in its flagship units of Food and Clothing, Home & Beauty.
Long since the jewel in the crown of the group, the Food unit came into its own again over the period with increased sales amounting to 8.7%, and 8.9% on a like-for-like basis. Its innovative offerings continue to resonate with customers, with more choosing M&S for their entire Christmas shop, resulting in a record day for the unit. The revitalised Meanwhile, Clothing, Home & Beauty posted a record week, with sales for the period rising by 1% and by 1.9% like-for-like, underneath which was growth of 11.7% online. As such, group sales for the period grew by 5.9% to £4.1 billion, marginally ahead of the market estimate of £3.96 billion.
The company anticipates a tougher year ahead, as customers potentially retrench in light of higher for longer interest rates and the possibility of higher goods prices following the measures announced in the Budget. However, for the time being M&S is strongly back in fashion with investors and customers alike. Further tweaks to its store rotation programme, more investment into smaller ranges such as Home and Beauty, while targeting an improvement to its online offering and a reset of its International business are all signs of a business which will not be resting on its laurels.
Over the last two years, as the transformation of the group has taken hold, the share price has risen by 174%. Over the last year alone, the shares have added 30%, as compared to a gain of 7.4% for the wider FTSE 100. Even after this run appetite for the stock is undiminished, and with prospects for the next leg of growth in mind, the market consensus of the shares as a strong buy reflects hope all round that this success story can continue.
2. Tesco
Tesco (LON:TSCO) still rules the roost in the British aisles, following another robust trading period which included further gains in its market share to consolidate its dominant grocery position.
Retail like-for like-sales rose by 2.8% over the quarter and by 3.8% over Christmas, with any number of eye-catching performances underpinning this growth. Sales of food increased by 4.7%, accompanied by a hike of 15.5% in its “Finest” range, while online added 10.8% for the period. With these achievements now in the bag, Tesco has reiterated its full-year guidance for a range of between £1.4 billion to £1.8 billion in free cash flow, and for around £2.9 billion in adjusted operating profit. A further boost is likely to come from the contribution of Tesco Bank, where adjusted operating profit is expected to hit £120 million.
While Tesco continues to flex its muscles in a notoriously competitive environment, expectations also progressively increase, lessening the likelihood of positive shocks for investors. The share price reaction to the numbers could relate to a tinge of disappointment that guidance was not expanded following the festive success, even though the sales numbers were largely in line or ahead of expectations.
Nonetheless, the momentum has been positive of late for Tesco, where the shares have risen by 22% over the last year, as compared to a gain of 7.4% for the wider FTSE 100. This feeds into a gain of 53% over the last few years, leaving a valuation which is more indicative of the strides which the group continues to make. Regardless of the fact that investors have given a cool reception to the update, the longstanding market consensus of the shares as a strong buy and the preferred play in the sector is unlikely to waver.