Retailers are upgrading but investors are downgrading

New year updates from some of the biggest retailers in the country have been almost universally positive, but you wouldn’t know it from the share price reaction.

Today, Tesco PLC (LSE:TSCO) and Marks and Spencer Group PLC (LSE:MKS) both unveiled impressive updates this morning, with the former saying it expects operating profit to be slightly above the top-end of its previous guidance, and the latter confirming its on track for a big swing back to profits.

But the FTSE 100 grocer’s shares fell over 1%, and M&S saw its tumble almost 8%.

READ: Merry Xmas for retailers but expectations were not high and challenges remain

In this retail-packed week, an overwhelmingly positive update yesterday from JD Sports Fashion PLC (LSE:JD.) saw its shares drop almost 4% on the day and another 6.5% today. 

J Sainsbury PLC (LSE:SBRY), too, has seen its shares gain 4% since its update yesterday.

Arguably Sainsbury’s delivered a less positive update than larger rival Tesco, with its grocery business doing all the heavy lifting to make up for a disappointing Christmas for Argos, while M&S beat consensus expectations in both its Food and Clothing & Home businesses and tweaked its profit guidance upwards.

However, some investors and analysts were clearly expecting better, while also eyeing tougher times ahead.

Analysts were hoping for more, with M&S’s guidance of £500mln was around £20mln short of the City consensus, and almost £50mln short of what those at UBS had pencilled in.

There are headwinds ahead for the supermarket sector, though, including Covid uncertainty, rising costs, an ongoing challenge from discounters Aldi and Lidl, and a new challenge to online deliveries from the super-fast delivery services like Getir, Gorillas, Gopuff and Zapp.

For many British households, especially those on the lowest incomes in the UK, rising prices, including energy bills, are a worry.

“We have seen much worse UK consumer economic metrics that those at present,” said Shore Cap analyst Clive Black, noting that wider price inflation is being largely matched by wage growth, with household liquidity and wealth both fairly comfortable.

“So, despite the vested political, economic, and cultural interests, the UK standard of living crisis may not be as extreme as many suggest, especially for many M&S customers, who we feel will, in the main, still be able to afford their food and gas bills.”

For all the retailers, if they can keep control of their costs and inflation is relatively mild, they should be able to ride out the cold winter.

And there is a feeling that many of the sector’s cannier operators are holding back more meaningful upgrades until they are more confident about the external situation.