The Week Ahead: Tesco and Sainsbury

Published in Investing on 2 October 2009

Next week, two supermarket giants go head to head.

It is that time of year when supermarkets vie for bragging rights as to who has the fastest growth rate in town. Currently in pole is Morrison (LSE: MRW) which boasted like-for-like sales growth of 7.8% last month. Tesco (LSE: TSCO) will step into the fray on Tuesday with its half-year results.

Every little helps

Tesco claimed in June that it had made a good start to the year. After thirteen weeks, group sales had grown 13% with international operations boosting performance with 20% growth in sales. Like-for-like growth in the mature UK market was a mundane 4.3%, though. But while sales appear to be on track, there are rumblings that Tesco may have saddled itself with too much debt in pursuit of growth.

Tesco has net debt of almost £10b, which is about a third of its market value of £31b. Interest on these borrowings is covered more than twice by profits. Even still, Tesco may outline a strategy to pare down its debt.

Sainsbury (LSE: SBRY) will report second-quarter sales on Wednesday. The UK's third biggest supermarket recently raised £445m to finance growth. It has bought nine stores from the Co-op to add to the two dozen it has already bagged. In the previous quarter, total sales rose 3.2% with like-for-like sales up 7.8%.

Food for thought

Sticking with groceries, Northern Foods (LSE: NFDS) has benefited from the warm weather that has boosted sandwich and salad sales. However, the food processor has been under pressure from supermarkets demanding better terms. Northern Foods, which is pencilled in for a trading update on Tuesday, has still been able to push through a price increase of 1.3%.

British Airways (LSE: BAY) recently announced the launch of an upmarket service between London City Airport and New York JFK. Ticket prices could cost around £3,000 for a one-way trip. This, together with draconian measures such withdrawing complimentary hot towels on short-haul business-class flights and charging passengers who want to choose their seats, is expected to whittle down the airline's losses and turn around its fortunes.

On Monday, BA will report September traffic figures. In August, it carried 1.7% fewer passengers than a year ago. EasyJet (LSE: EZJ) will also report passenger traffic figures next week. In contrast to BA, the budget airline carried 4.7% more passengers in August compared to last year. It managed to fill 91.8% of its planes, up 91.3% last year.

Jobs for the boys

A trio of recruiters provide updates next week. A recent £30m fine from the Office of Fair Trading may be the main talking point within Thursday's statement from Hays (LSE: HAS), while on Wednesday a third-quarter message from Michael Page International (LSE: MPI) might boast about the group's healthy £100m net cash position.

But the sector highlight could be Thursday's annual figures from AIM-traded Matchtech (LSE: MTEC). Having already forewarned of lower profits, this likeable small-cap has suggested its 15.6p per share dividend should be maintained. The shares at 180p might therefore be worth a look.

Elsewhere, two illustrious dividend payers reveal their progress. PZ Cussons (LSE: PZC), the business behind Imperial Leather soap, has lifted its payout every year since at least 1989 and issues a first-quarter statement on Monday. Meanwhile, fashion chain Ted Baker (LSE: TBK), which has raised its dividend every year after floating in 1997, might increase its payout further with interim figures on Thursday.

Finally, the Bank of England will announce its latest interest-rate decision on Thursday. Despite the surprising rebound in house prices, the Monetary Policy Committee is expected to leave rates unchanged.

Notable results and updates

Monday: British Airways and PZ Cussons
Tuesday: Tesco and Northern Foods
Wednesday: Michael Page International, Sainsbury and Sportingbet
Thursday: Carphone Warehouse, easyJet, Halfords, Hays and Ted Baker
Friday: John Wood Group

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