ASDA, Iceland, Morrisons - comment

Tesco’s latest results point to a better margin environment across UK grocery. Productivity, mix and cost savings are increasingly offsetting price investment and cost inflation, and we think this trend should extend beyond Tesco.

The read-through is positive for the leveraged names. Morrisons should continue to benefit from its savings programme, while Asda has arguably the greatest scope for recovery given its depressed starting point and the potential unwind of separation/exceptional costs as trading improves. Iceland could also see meaningful EBITDA upside from modest margin improvement.

We would not extrapolate Tesco’s gains one-for-one, but the direction of travel supports some margin recovery across the sector. For the more highly levered names, even modest margin improvement would translate into meaningful EBITDA and leverage benefits.