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January 7, 2010

INSIGHT: Sainsbury’s King issues warning on economy

UK retailer Sainsbury’s, which this morning (7 January) posted strong quarterly sales, has warned consumer confidence will be hit by higher taxes in 2010.

UK retailer Sainsbury’s, which this morning (7 January) posted strong quarterly sales, has warned consumer confidence will be hit by higher taxes in 2010.

The retailer posted a 3.7% rise in like-for-like sales, reporting a “record” performance over the Christmas period.

Total sales for Sainsbury’s fiscal third quarter were up 6.2%, while weekly transactions were up by one million year-on-year.

However, chief executive Justin King (pictured) told analysts that there are “only two certainties” for the year ahead – “higher tax and lower expenditure, neither of which are going to be good news for consumers”.

“My view hasn’t changed for a good while, which is that there is no reason to suppose that for consumers there is much good news in 2010,” King said.

Despite this, King said he expects Sainsbury’s fourth-quarter numbers to be ahead of last year’s as it demonstrates it has withstood the economic downturn.

He added that Sainsbury’s has an ability to “keep trading well”. “That is probably why it’s the shortest outlook statement we’ve ever given”, he said.

“We’ve already said ‘it’ll be what it’ll be’. But we think we can trade well within that. I’m assuming that quarter four’s numbers will be ahead of quarter four in 2008 because 2008 figures were so appalling,” King said, adding that in terms of household budgets “there will be more pressure”.

Richard Hunter, head of UK Equities at Hargreaves Lansdown Stockbrokers, acknowledged that Sainsbury’s trading update was “impressive” but said there remain “a number of investor doubts clouding nearer-term prospects”.

“Sales were above expectations, and sliced in different ways there were signs of a very robust performance – in particular the non-food and online elements clearly helped benefit the overall numbers, as did the concentrated advertising campaign,” Hunter said.

“However, the company also echoed the doubts expressed by most other consumer facing businesses at the moment regarding the challenging nature of the consumer horizon.”

Hunter said Sainsbury’s lack of overseas exposure limits expansion prospects unlike some of its rivals, while the defensive nature of the stock has, to some extent, seen it overlooked by investors more recently seeking cyclical plays.

“Given these headwinds, the share price has failed to make much progress, rising just 1% over the last six months, during which time the wider FTSE100 has added some 32%.

“Regardless of the strength of this trading update, the longer term concerns remain and the general market view is neutral towards the stock,” Hunter added.

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