The verdict from the City: Sainsbury's trading update

By Dean Best | 13 June 2012

The UK's third-largest retailer said today (13 June) it was continuing to perform better than the rest of the market after another increase in underlying quarterly sales. However, shares in Sainsbury's fell after the company's sales missed City forecasts and there are some concerns increased competition from the likes of Tesco could erode the gains the retailer has made in recent months.

Shore Capital analyst Clive Black

"Sainsbury did continue to outperform the market and its same store sales are circa 3% ahead of its key competitor Tesco and management stated that Q1 represents a stronger market outperformance than the 2.6% LFL sales reported in Q4 2011/12. However, Sainsbury's differential over Tesco may be starting to narrow and it is noteworthy that this statement included The Queen's Diamond Jubilee, whereas Tesco's update did not.

"Sainsbury's has completed three-quarters of the relaunch of its mainstream private label under the by Sainsbury banner. Such work can said to have supported trade but it may be increasingly needed as Tesco and Morrisons commence private-label range reviews. Put another way, has Sainsbury enjoyed the peak benefit of its range modernisation already?

"Shore Capital has a 'hold' stance on Sainsbury's stock. Sainsbury's is struggling to build its return on sales by its aspired ten to 20 basis points per annum. Sainsbury's is also girding its loins for whatever a self-improving Tesco can throw at it by way of competitive pressure."

Matthew Truman, J.P. Morgan Cazenove

"The quarter included the Jubilee celebrations which we believe added – if in line with Tesco – c. 100-150bps to trading performance, a little bit ahead of what we originally previewed. This contribution along with the circa 80 basis points from extensions and an additional contribution from the maturity of a significant amount of immature space would suggest that LFL at the "core store" business was therefore negative and much closer to peers than headlines suggest. As with Tesco the summer of events – if traded profitably – may result in this weakness being managed and the industry receiving a boost; indeed Sainsbury remain "well placed to continue to outperform the market" which is encouraging. 

"In spite of this, in the medium term, we continue to see few catalysts for this stock both structurally or strategically and reiterate our underweight recommendation as sales growth on a core basis moves back towards the pack."

ING analyst Jan Meijer

"Sainsbury reported disappointing figures as like-for-like sales growth ex fuel came in at +1.4% while the market was expecting +1.8% (and ING at 2.5% even). The trading period included the Diamond Jubilee but contained the same number of bank holidays (five) as last year. The figures indicate that market growth has come down in recent months. The contribution from extensions, which has been a strong backbone for like-for-likes, is already declining where the company only announced to cut down on capex at the full year update last month."

Richard Hunter, head of equities at Hargreaves Lansdown Stockbrokers

"Sainsbury's rise in sales was steady but shy of expectations, with the shares reflecting a tinge of disappointment in early trade. The numbers were boosted by including the Jubilee weekend, unlike Tesco, and progress in clothing and online remained notably strong. In addition, the accompanying management comments were upbeat, particularly when bearing in mind the current squeeze on consumer incomes.

"The current dividend yield of 5.5% is supportive and, for the moment, the focus on the UK customer frees the company from having to spin the number of strategic plates with which the likes of Tesco is grappling. Even so, the perennial presence of the Qatari stake is a drag on the price, whilst the pressure on margins in general within the industry remains intense."

Berenberg analyst Niamh McSherry

"This was a decent result from Sainsbury's, particularly relative to the overall market which has also slowed, and we are slightly surprised by the negative share price reaction. However, expectations for the impact of the Jubilee may have increased since Tesco's assertion on Monday that the Jubilee week was its biggest week of sales ever outside of Christmas. In this context, the slowdown in Sainsbury's like-for-like from the 2.6% like-for-like reported in Q4 to just 1.4% may be disappointing. We have made minor revisions to our forecasts, reducing sales and EPS estimates by less than 1%.

"While we view Sainsbury's as a well-run company with an attractive asset base, we believe there is better value elsewhere in the sector. Over the long term, we see Morrisons, trading on 9.5x next-12-months price to earnings ratio, as the best-positioned UK food retailer due to its negligible exposure to large-format stores and non-food sales, combined with a strong management team and balance sheet.

Conlumino lead consultant Matt Piner

"Sainsbury's focus on quality on a budget has once again helped it tap into the mood of a nation. With a number of bank holidays and the Jubilee falling into the period, consumers were in the mood to celebrate but without blowing the budget, and Sainsbury's has positioned itself brilliantly to capture this spend.

"There is also no doubt that Sainsbury's has benefited from being much less mature in certain areas than major rival Tesco. Indeed non-food continues to grow faster than food and convenience sales grew by 16%, with 21 new outlets opened.

"Excluding the impact of extensions, Sainsbury's LFLs were just 0.6%, a long way from the sort of growth enjoyed just two to three years ago. But with food inflation falling and a much more competitive market, this now represents a decent performance. By continuing to improve stores and products and developing its fledgling non-food, online and convenience offers, Sainsbury's is well placed to keep eating into Tesco's market share."

Sectors: Financials, Multichannel, Retail

Companies: Sainsbury’s, Tesco, Morrisons, Meijer

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