Markets take a breather, Tesco fails to sustain high sales growth and Inchcape points to higher-than-expected profit

“Markets were relatively calm on Friday as investors took time to digest the Federal Reserve’s shock earlier this week that US interest rates might go up sooner than previously expected,” says Russ Mould, Investment Director at AJ Bell.

“The FTSE 100 slipped 0.2% to 7,139 as oil producers and financials gave up some of their recent gains. Industrials and miners were among the top risers, including Rio Tinto which staged a small recovery after being in a falling trend since the start of June. China recently said it would release metal reserves to calm a strong rally in commodity prices, and this has weighed on the mining sector in general.

“The more UK domestic-focused FTSE 250 moved 0.2% higher to 22,570 with miners, industrials and airlines catching favour with investors. Dr Martens continued to slide following yesterday’s big slump.

“Next week is skinny on the large cap stock reporting front, with only DS Smith and Nike standing out.”

Tesco

“Tesco’s first quarter 2021 figures were never going to live up to last year’s comparable period, as the three months to May included the period where the nation went crazy stockpiling food and drink as the pandemic took its grip. The supermarket saw 7.9% like-for-sales growth in Q1 2020, setting the bar very high this time around.

“That might explain why Tesco is trying to push two-year figures in its latest update, to emphasis the unusual nature of last year’s performance and to convince the market that its business hasn’t ground to a halt.

“To its credit, 1% like-for-like growth on a one-year basis is not a disaster. It implies that Tesco is holding its own against tough competition in the grocery space and no doubt retained lots of the customers it won in 2020 from having wider availability of online delivery slots than its peers.

“General merchandising and clothing sales shot up in the first quarter of 2021, perhaps because people were focused purely on food and drink a year earlier, so the comparable figures were easy to beat.

“Clothing sales will have suffered in the early stages of lockdown, so it makes sense to see them bounce back as lockdown restrictions ease and people are able to get out and about. Wholesale sales via Booker are also picking up as the hospitality industry reopens.

“Tesco has achieved so much in the past year, like many other supermarkets. It dramatically doubled the capacity of its online delivery operations in a very short time during Covid, and it went above and beyond to keep shelves stocked and customers happy. Tesco is now a stronger business and it will be interesting to see what it does next.

“There is a growing trend for one-hour delivery services and Tesco is trialling its version called Whoosh. It’s just a small pilot and one has to wonder if this market is really worth chasing, but Tesco has shown willingness to try different ways to sell goods. Not all of them succeed, and the jury is still out on the Jack’s discount chain which is still only 12 stores-strong despite a lot of fanfare about the launch in 2018.

“Tesco must also deal with food price inflation and decide if it can pass on all the extra costs to customers or risk a squeeze on profit margins. The forthcoming launch of Russian discount supermarket Mere in the UK will add to the competition, so Tesco needs to be very careful that any changes to its prices don’t alienate its customers.

“At the same time, it needs to bring down costs which escalated during the pandemic. Many of these were Covid-related, such as safety measures, so one can expect them to fall in time.”

Inchcape

“Inchcape CEO Duncan Tait is off to a very fast start. Since he took the wheel at the car distribution and dealership firm at the beginning of the July last year its shares are up more than 60%.

“How much credit he can take for this accelerated performance is open to question given the move has been fuelled by very supportive market conditions and the wider recovery in equities.

“Chip shortages have hit production of new cars, creating a very tight supply situation, while demand has been boosted as we move out of lockdown and as people are reluctant to use public transport to get around.

“It’s no wonder Inchcape is pointing to higher-than-expected profit, though notably this is still likely to be below pre-pandemic levels.

“Chip shortages could move from being a fuel injection to a speed bump if they mean Inchcape itself is struggling to source the cars people want and when they want them.

“Inchcape does at least benefit from a distribution-focused model and global diversification with its revenue streams running the gamut from new and used car sales, finance and insurance products to high-margin aftersales.”

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