Richard Bowman, head of equities, Hargreaves Lansdown Stockbrokers
Sainsbury may have pipped Tesco at the post in terms of growing UK sales, but for overall prospects Tesco remains the darling of the sector. Sainsbury’s high profile advertising campaigns and concentration on lower priced, own label offerings have continued to attract the cost conscious consumer. Its general expansion focus has also contributed, whilst the property portfolio and dividend yield (currently 5.4%) are supportive to the investment case. However, the trading environment remains notoriously difficult and the Qatari stake continues to cast a shadow to share price appreciation in the background. At Tesco, the multi-pronged approach is helping to deliver a robust growth model. The UK performance was muted in the period, whilst the US continues to run at a loss, even though the turnaround plan seems to be clearly on track. Any such drags were offset, however, by progress in profit growth in the European and Asian regions of 12% and 19% respectively. Market consensus reflects the differing fortunes and prospects for both companies. The general view is that whilst Sainsbury continues to be seen as a weak hold, Tesco remains a convincing buy.
Christopher Hogbin, Sanford Bernstein
Putting the performance in to context, Sainsbury’s UK like-for-like sales performance is better than Tesco, but lags Morrisons. However, in terms of group sales growth, Sainsbury’s still lags Tesco. Sainsbury’s weak year-to-date share performance has bought PE (12e) back in line with UK peers, and in absolute terms valuation should be well supported by real estate backing (with Sainsbury’s estimating the market value of its property to be GBP10.5bn), as well 6% dividend yield. However, we see better value in the other UK names. With Morrisons likely to perform better in the UK and Tesco offering a more broad based growth outlook with international and retailing services.
Darren Shirley, Shore Capital
We believe that Tesco is moving in the right direction in the UK, it has a demonstrably meaningful and contributing international business. In the UK, Tesco is seeking to make it more competitive and not just through pricing. We are especially pleased to see reference to ranging, service and store environment and we encourage management to be more judicious still in space plans; UK profit performance beat our expectation at the half-year. In International Tesco has exceeded our expectations with a material beat in Asia, helped by 33 bps of margin expansion and nearly 4% like-for-like sales growth. Sainsbury, unexpectedly in our view, has reported trading through Q2 (16 weeks to 1st October) in-line with the 1.9% reported for Q1 (with Q1 including the strong, industry wide, April trading which has proved to be the anomaly in 2012 to date). Management has reported like-for-like sales including VAT, excluding fuel increasing by 1.9% (Shore Capital forecast 0.5%), and stripping out the impact of VAT (we estimate contributes 0.9%) then LFL sales (ex VAT, ex-petrol) increased by a resilient 1%.
Matthew Truman, J.P. Morgan Cazenove
Given sales growth in non-food was “well ahead” of the grocery business, it would appear the gap between Sainsbury’s grocery performance and Tesco’s “positive” grocery like-for-like sales disclosed this morning is closing rapidly with further pressure to come as Tesco’s recently announced price chop strategy comes into consumers’ mindsets. It is worth remembering Sainsbury has the largest top line support from as yet unprofitable growth meaning underlying like-for-likes are materially worse than the market believes. For example, the “headline” 1% ex VAT excluding fuel reported in Q2 is supported by 1% growth from extensions and 1.3% from the maturity curve of new space meaning the core business is probably running at -1.3% at present. Meaning also volumes [fell by more than] 4% given inflation of 3%. With stagflation a perfect storm for Sainsbury with a higher exposure to both inflation linked leases and inflation linked debt, one would assume profitability is under pressure. Tesco’s interim statement shows the value of a diversified asset with exposure to structural growth. The source of the structural growth in this release has come from a powerful performance internationally despite some materially difficult comparatives for 2Q. Positively, Tesco’s 2Q UK like-for-likes is better than expected at -0.9% implying that the grocery like-for-like was positive. Action has been taken in the UK to re-assert its strategic authority, the US is on track to meet expectations, International like-for-likes were materially stronger than consensus despite circa 700 basis points tougher comps in Asia and the group still grew 6% in the most challenging of macro-economic backdrops.