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Sainburys: Brokers give their verdict

Cherry Reynard
Written By:
Cherry Reynard
Posted:
Updated:
10/12/2014

Sainsburys gave a poor trading update and downgraded its profits forecasts. What do brokers make of its prospects from here?

Clive Black and Darren Shirley, Shore Capital

Sainsbury’s has reported what amounts to a very poor trading update for the company when set against the sector and where the group has come from over recent years. With convenience, non-food and online all growing, Sainsbury’s is now facing the problems of the falling attractiveness of the superstore to an ever growing proportion of the UK population. CEO, Mike Coupe, characterised the prevailing conditions well when he stated:

“The market remains dynamic and fiercely competitive. The long-running trend of more frequent, convenient shopping has accelerated, resulting in smaller basket sizes. An increase in price investment and short-term competitor promotional activity, combined with favourable commodity markets, has resulted in deflation in many areas of our food business…”.

We are provisionally downgrading profit expectations by 17 per cent. Our previous expectation of flat like-for-like sales in the second quarter is now too optimistic. Applying a fall of 2 per cent, noting management guidance and the favourable Q4 comparative, and a modicum of negative operational gearing, say 65 basis points of margin to 3 per cent, we estimate a fall in full year 2015 retail trading profits of 16 per cent.

As a matter of prudence we have downgraded future dividend expectations for subsequent years to a flat outcome. This will depend on the profit performance of the group and management’s strategic review and may yet be too optimistic.
Sainsbury’s shares now trade at a significant discount – 20 per cent – to its March 2014 net asset value. This could be vulnerable to further write-downs if the projected cash flows from store assets cannot be sustained, noting as we do that superstores are the real weak link here.

Change is taking place – Sainsbury’s movements on price last week and its opening of Netto stores (five by the financial year-end) indicate the start of a fight-back and an end to the ‘free-lunch’ enjoyed by the limited assortment discounters at the expense of the multiples. We reiterate our HOLD stance on Sainsbury’s shares, shares that may bounce of recent lows today with recent trading a little better than feared.

Bryan Roberts, Kantar Retail, Retail Insights Director – EMEA

“While containing few surprises, this trading update from Sainsbury’s would seem to confirm that the retailer – hitherto reasonably insulated from the discounter chill – has started ceding shoppers to the more price-led retailers. In this context, a move to offer lower non-promotional prices is a welcome one, although we are less than convinced by the clarity of the messaging around it. Dropping Tesco comparisons from Brand Match appears a logical move given that Asda is the sector’s price leader, but then relentlessly comparing Sainsbury’s prices to Tesco prices in TV ads just muddies the waters. Fears over Sainsbury’s margins and the dividend will be intensified, particularly as Tesco will come out of the traps in 2015 with all guns blazing.”

Richard Hunter, Head of Equities at Hargreaves Lansdown Stockbrokers

“The fall in sales is more gradual than had been expected and, in something of a sign of the times for the beleaguered supermarket sector, the share price has reacted positively due to sheer relief.

From an investment perspective, the dividend yield has recently spiked to 6.7 per cent which, although mostly driven by the share price decline, is extremely attractive in the current interest rate environment – assuming that it is maintained after the company’s strategic review. Meanwhile, the company’s transition to increase its focus on convenience and online shopping may begin to enable Sainsbury to ride the current consumer wave. Elsewhere, there are some glimmers of hope coming from the clothing and general merchandising lines. Even so, price deflation, smaller basket sizes and promotional activity are all taking their toll on margins, profits and market share, and the company’s immediate outlook comments were understandably guarded.

Sainsbury’s share price has worsened considerably of late, partially caught in the Tesco crossfire but also as an ongoing result of the increasing competition from the discounters. The 36 per cent drop over the last year compares to a 2.5 per cent rise for the wider FTSE 100, with the market remaining unconvinced on prospects – the consensus now comes in at a weak hold.”