Blog: Dean BestTesco, Sainsbury's to update market next week

Dean Best | 8 June 2012

Two of the UK's largest food retailers are set to provide an update on the first quarters of their financial years next week, periods that have proved challenging for all in the sector.

On Monday, Tesco, the country's largest retailer, will issue a trading update for the 13 weeks to 26 May; two days later, Sainsbury's will report its sales for the first quarter of its financial year, which ran up until 9 June.

The last three months or so have, again, been characterised by weak consumer confidence, continued declines in sales volumes, volatile inflation and, in some ways, even more volatile weather.

Apart from a few sunny days in May, the weather in the UK in April and in early June has hardly provided UK retailers with the boost they were likely to be hoping for.

What should the market be looking for in the retailers' results?

Well, for Tesco, industry watchers will be looking for evidence that the retailer's efforts to revitalise its UK business are working. The company has invested in its stores, its product portfolio and its staff to boost sales, which, on a like-for-like basis, have fallen for a number of quarters.

Analysts expect Tesco's underlying sales to again fall, although there is a recognition that the retailer's initiatives will take time to pay off.

Shore Capital analyst Clive Black believes Tesco's like-for-like sales, excluding fuel, will have fallen by 1-2%, which he described as "similar or slightly worse than the Q4 2011/12A performance of minus 1.6%".

He added: "The market share data, which includes new space, suggests that Tesco has been marginally underperforming the industry, trading well behind Asda and to a lesser extent Sainsbury's but a little better than Morrisons. So, in a weak and volatile market we expect Tesco UK's trading to still be challenging with management 'getting on' with self-improvement, but it remains early days. What we can say from a store execution perspective is that whilst far from perfect, Tesco UK has taken steps forward in the past three months."

Tesco's update will not include any data on trading over the Diamond Jubilee weekend but Sainsbury's first quarter does cover the period, which the retail sector had been hoping would be the first of a trio of events (alongside the EURO 2012 football championship and the Olympics) that would boost sales.

However, anyone that even glanced at the Jubilee celebrations will know that, at times, it was a rather damp affair.

"The Jubilee has not probably been what was hoped from a trading perspective," Black said.

He predicts Sainsbury's like-for-like sales, excluding fuel (but which include VAT), will have increased by 1-1.5%. Sainsbury's forecast a 2% climb in like-for-like sales over its full financial year.

Reflecting on Sainsbury's recent performance, Black said: "Sainsbury continues to slog it out well in far from ideal conditions, reflecting the reassurance that it provides its customers on pricing through Brand Match whilst extolling the qualitative virtues of its product offer, particularly private label, in terms of what are qualitative matters such as product specification, authenticity and range density."

However, with rival Tesco looking to boost its UK business, could Sainsbury's find itself squeezed in the months ahead?

"Whilst Sainsbury stock has robust downside protection from its assets and income stream we cannot say that it has a compelling investment case from an earnings or cash flow perspective at this juncture. We make this assertion because the UK food retailing industry is facing sustained weak demand and margin compression, not least as the market leader seeks to self-improve through investment. hat said, we believe our Sainsbury forecasts are sensibly pitched," Black said.

Nevertheless, he added: "That self-improvement programme could yet pose challenges for Sainsbury in particular given the high degree of overlap in England."


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