What the analysts say: Does Sainsbury's LFL sales drop hint at future woe?
Mixed reaction to Sainsbury's Q4 LFL sales dip
UK supermarket operator Sainsbury's broke its nine-year streak of like-for-like sales growth this morning (18 March), when the firm acknowledged that market conditions and tough comparables hit revenue expansion in the fourth-quarter. In contrast to the other multiples, Sainsbury's does not appear to be loosing share in the UK to discounters Aldi and Lidl. But, as price competition in the market intensifies, could Sainsbury's proposition too come under increasing pressure? Here is the City's verdict.
Shore Capital analyst Clive Black
"Sainsbury's long-standing record of positive like-for-like (LFL) sales has come to an abrupt end with its Q4 2013/14 trading update that is a little worse than our downbeat expectations. Such a performance will be a particular disappointment to outgoing CEO, Justin King, and perhaps more of a concern and worry to his replacement, Mike Coupe, and the group's shareholders. With the deceleration in trade, which leads us to suspect a weaker than anticipated entry rate into 2014/15F, and against an industry gross margin investment environment that is demonstrably more shaky year-on-year, we are cutting our forecasts and recommendation on Sainsbury's shares."
Mike Dennis, Cantor Fitzgerald Europe Research
"This trading update is in line with our revised expectations and marks Sainsbury's first negative trading update for 37 quarters. However, this needs to be placed in context of last year when Sainsbury's reported a very strong Q4 LFL up 3.6%, Easter and Mother's Day are later this year and Sainsbury's reduced online marketing spend while relaunching their website (+6% growth). This meant sales growth has slowed to the market average and the outcome was potentially going to be weaker. The Q1 trading should improve but that will also depend on the impact of price deflation on high volume lines (bread, milk, eggs).
However, the market outlook is for lower food price inflation and potentially more trading down to own label products. Sainsbury's is well placed in own label quality and states that its own label range is now 51% of sales versus 47% for the total grocery market. With the significant level of price investment in own label, we expect JS's 20% price gap with brands to widen in 2014 albeit own label sales growth should be ahead of brands."
Richard Hunter, head of equities at Hargreaves Lansdown Stockbrokers
"Against strong comparatives, the sales number fell and by more than the market had been expecting. Meanwhile, the march of the discount supermarkets continues to threaten prospects, whilst the strategic measures being taken by Sainsbury's quoted rivals will exert further pressure. In addition, the group's accompanying comments reflect caution over the medium-term outlook, even after this difficult quarter. More positively, the company is enjoying some success in the increasingly important areas of convenience stores and online, whilst general merchandising is showing further progress and market share has been maintained. From an investment perspective, the dividend yield of 5.3% is notable in the context of the current interest rate environment.
Last week's Morrisons-induced share price tumble has contributed to a 21% decline in the share price over the last six months alone, as compared to a flat showing from the wider FTSE100. Investors' general ennui with the sector at present is perhaps best illustrated by the fact that Sainsbury is currently the preferred play, even though the market consensus comes in at no more than a strong hold."
George Scott, food and grocery analyst at Conlumino
"Following a soft Christmas trading period, this performance ends an astonishing run of 36 quarters of comparable growth, with Sainsbury's finally yielding under the rising pressure of discounters and prudent consumer mind-sets. Furthermore, with the actions of its Big Four peers suggesting a price war is likely to erupt, suggesting this could be the opening chapter of a more difficult period for Sainsbury's and its new CEO will finds himself inheriting the business at a tricky time.
"On the face of it, this slowdown seems typical of the pressures facing the traditional Big Four; discounters Aldi and Lidl have thrived, amid widespread trading down, while a fall in volumes and a need to tailor pricing to more cautious consumers has squeezed LFLs. However, this decline, is not as bad as it at first looks; the later timing of Easter and Mother's Day, as well as some unseasonable weather, has naturally limited Sainsbury's growth in Q4 vs. last year. Moreover, while Tesco, Asda and Morrisons have all consistently lost market share, Sainsbury's has enjoyed a long period of outperformance. Sainsbury's balanced positioning, via a convincing own-label, brand price match and Nectar Card membership, have combined with its convenience-led store strategy and online push, to drive strong market relevance, affording it some insulation, at least until now."
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