As Christmas becomes a distant memory, supermarkets that have reported on the festive season and fiscal Q3 are now looking to finish the financial year strongly. Will these two UK supermarket stocks perform well in 2022? Andrew Woods takes a closer look to decide which he would add to his portfolio for long-term growth in the years ahead.
Tesco’s steady growth
In its Q3 and Christmas trading update for the 19 weeks ending 8 January 2022, Tesco (LSE: TSCO) said overall sales grew 2.6% year-on-year and 8.2% on a two-year comparison. The report also emphasised that the pandemic-induced boom in online orders continued with online sales still above pre-Covid levels. Indeed, 1.2m online orders were placed per week during Q3. Tesco’s smaller retail businesses, like Londis and Premier, also reported sales growth of 19.5% during the period compared with two years ago.
And it’s continuing to invest in online growth. In December 2021, the supermarkets giant teamed up with food delivery company Just Eat Takeaway to forge a partnership through the Tesco subsidiary One Stop. This will support its online business.
Meanwhile, this month, Kantar Research was positive about Tesco’s future prospects, citing a bumper Christmas and sales at the highest level since the beginning of the pandemic.
Not that growth is a new phenomenon for the firm. In fact, earnings-per-share (EPS) growth have been strong over the past five years. EPS increased 78.7% during this period and dividend yields have also risen. In 2018, the dividend yield was 1.5% and 3p per share. By 2021, this had grown to a 4.1% yield and 60.08p per share.
Yet there are risks. The ongoing threat of strike action by distribution workers is one. This was averted in December 2021 after Tesco agreed to pay workers in line with inflation. Going forward, this could be an issue that affects the company’s ability to stock shelves.
How does Sainsbury’s compare?
In its Q3 and Christmas report for the 16 weeks to 8 January 2022, J Sainsbury (LSE: SBRY) announced that total sales (excluding fuel) declined 4.5% on a year-on-year basis. Compared with the same period two years previously, however, Q3 sales rose 1.4%.
Also, Christmas in particular was disappointing for the retailer. Sales fell 2.4% owing to the struggles of one of its brands, Argos, to supply technology items and toys.
The year-on-year fall continued the negative news flow from last year, In March 2021, for instance, the company announced over 1,000 jobs would be axed.
Analysts at Jefferies also noted in June 2021 that Sainsbury’s earnings may be at an eight-year peak, arguing that earnings upgrades “had largely run their course”. Indeed, the EPS trajectory over the past five years tells the opposite story to Tesco. Sainsbury’s EPS has declined 46.3% over this period and this sustained fall would put me off adding the stock to my portfolio. Nonetheless, the company increased its underlying profit guidance for the financial year to March 2022 to be £720m (instead of £660m) before tax, which was positive news.
While both of these stocks are UK food retail giants, I would buy Tesco shares over Sainsbury’s as I feel Tesco is delivering sustained growth for shareholders.
Andrew Woods does not have a position in any of the stocks mentioned. The Motley Fool UK has recommended Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
