The retailer reported like-for-like sales (LFL), excluding new stores and fuel down by 1.1% in the 12 weeks to June 7 compared with the same period last year. Total sales were up by 1%, excluding fuel.
Sainsbury’s sales from new stores rose by 2.1%, while sales from convenience stores rose by 18%.
City analyst Shore Capital judged the results disappointing but better than some of its rivals. “By Sainsbury’s own standards … compliant like-for-like sales falling by 1.1% … is a disappointing outcome,” said Clive Black and Darren Shirley.
“However, against a backdrop of demonstrably weak industry sales, Sainsbury talked of the weakest quarter in a decade, the outcome is relatively sound when compared with Morrisons’ 7.1% fall and Tesco's 4% fall.”
Shore Capital retained its hold advice on Sainsbury’s stock. “Whereas we have negative recommendations on Sainsbury’s two listed FTSE-100 peers [Morrisons and Tesco], we retain a neutral stance on this supermarket chain,” said Black and Shirley.
‘Backdrop is not favourable’
“Whilst the backdrop is not favourable, not least due to increasing gross margin pressure and scope for negative operational gearing with falling LFL, we deem Sainsbury to be a relatively stable investment proposition.”
Outgoing Sainsbury boss Justin King’s successor Mike Coupe will have to grapple with significantly weaker markets for major British supermarkets, reflecting changes to consumer behaviour, new competitor dynamics, more food eaten out of the home and shifting sales channels, said Shore Capital.
“New space is not going to be the source of oxygen for the top-line that it once was for Sainsbury,” said Black and Shirley. “And with easier inflation and perhaps some gross margin pressure, particularly if Tesco UK has to reset, then it maybe that operating channels receive greater attentions as sector costs increasingly appear to have to be cut.”
Planet Retail said that Sainsbury’s commitment to reduce prices – along with the other big three retailers in a bid to combat pressure from discount rivals Aldi and Lidl – would impact its margins.
“Sainsbury is particularly vulnerable in this respect, having a lower operating margin than bigger rival Tesco. It is also trading in an environment where food volumes continue to stagnate,” said analyst David Gray.
“Even so, Sainsbury still has considerable long-term growth potential – with about half the market share of bigger rival Tesco. It is aggressively pursuing convenience expansion and we are forecasting that sales at its c-store business will reach more than £3.5bn by 2018.”
‘Still miles behind Tesco’
But the retailer’s convenience store estate was “still miles behind Tesco” with about 600 outlets compared with more than 2,000 operated by Britain’s biggest retailer.
Conlumino retail consultant George Scott agreed Sainsbury was more vulnerable to discounters’ competition than some of its rivals but said much depended on the retailer’s all round offer to consumers.
“Some might argue with an operating margin that has been below its immediate competitors, Sainsbury has less room to react to discounter impetus and is in for a more prolonged decline,” said Scott. “However the grocery game is a long one and as austerity eases, Sainsbury will benefit as consumers scrutinise wider attributes of their shopping purchases, broadening their consideration of price, quality, provenance and service.”
Sainsbury should maintain its distinctive identity, particularly around its Taste the Difference and mid-level own-labels, as its rivals converge around a narrower concept of value, built around sales volumes rather than values, said Scott.
(BMJ)