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Sainsbury’s results: Broker views split

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Sainsbury's delivered third quarter results ahead of expectations this week. Brokers give differing verdicts on the outlook for its shares.

Helal Miah, investment research analyst at The Share Centre

“In the 14 weeks to the 3rd of January, Sainsbury’s produced trading figures that were ahead of analyst expectations and the shares have reacted positively. Total retail sales fell by 2.5%, while like-for-like sales fell 3.9% with management attributing the decline largely down to lower fuel prices, deflation in the grocery market and the intense level of competition in the sector.

“With the increased disposable income as a consequence of lower petrol prices, sales in the company’s premium Taste the Difference range were up by 5%. Sales of general merchandise were also strong, with clothing sales in particular up by 10% year-on-year. The results also highlighted a growing tendency among shoppers for more frequent local shops rather than larger shops at bigger stores. The group has continued its expansion in this segment of the market by opening a further 25 convenience stores and refurbishing a further 7 during this period.

“We continue to recommend Sainsbury’s as a ‘buy’ for medium risk, income seeking investors. We believe that the sector will go through tough times but with future price cuts and investment worth £150m planned, Sainsbury’s should be better equipped to maintain its market share.

Bryan Roberts, director of retail insights, Kantar Retail

“Sainsbury’s performance, against a deflationary zero growth backdrop, is by no means a horror show and is likely to position Sainsbury’s as the second-best performer among the Big Four over the festive trading period. This week’s price cuts, although welcome, seemingly do little to narrow the price differential with Asda – and the discounters – and are arguably not far-reaching enough given how far the retailer has allowed its own brand prices to drift from competitors.

“2015 could be a challenge: lacking Tesco’s buying power and Asda’s efficiency, Sainsbury’s margins are set to be under further pressure. This might prompt some focus on costs, but we can only hope that any action in this regard focuses on back-end efficiencies rather than instore.”

Clive Black and Darren Shirley, Shore Capital Markets 

“Sainsbury’s has reported better trading than we feared for its third quarter…Within the statement we note that the convenience division was very strong, growing sales by 16% in the quarter, while clothing and general merchandise are also said to have performed well, clothing growing by 10%; a highly commendable performance in our view.

“No figure is given in the statement for Sainsbury’s online business although in the analysts’ call it was revealed to have delivered a 0.1% contribution to supermarket like-for-like sales (down from 0.3%) and so c6% growth. Such a performance is far from stellar and well behind admittedly less mature (John Lewis Partnership) and Ocado; the latter reported 14% growth to the end of November 2014. Sainsbury’s management reported that the online market was heavily promotional in the period under review and implied that Sainsbury sought to retain a degree of profit rationality.

While a little better than we expected, Sainsbury’s Q3 results sustains a period of difficult trading for the group. Market conditions are demonstrably weak, Mark Price (managing director of Waitrose) yesterday (6th January 2015) characterised the festive trading environment as ‘tough’.

Following the November strategic review we materially cut our expectations for Sainsbury’s full year results. We are not inclined to change our present forecasts as Mr. Rogers pointed out no change to full year guidance per se and specifically with respect to costs, which are expected to come in at the lower end of the 2-3% range.

We retain our cautious stance on Sainsbury’s shares. Accordingly, while we note the distinctive shareholder register at Sainsbury, we are more concerned about falling earnings and dividends than take-over possibilities at this stage. More to the point, we currently lack confidence to be more positive on Sainsbury given the aforementioned industry dynamics. Put another way, we believe that Morrison’s and Tesco UK may be in a superior competitive position for the prevailing trading environment, one where it looks like Sainsbury could be vulnerable player in the middle, undercut by more price and cost aggressive retailers beneath and losing share to the growing premium retailers in the form of Marks & Spencer and Waitrose (John Lewis Partnership). We retain our sell rating on the shares.


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