Ahead of this mornings Q3 trading update, Sainsbury was the most out-of-favour supermarket with the City experts.
In the event, Sainsbury beat the analyst consensus for a 3.2% drop in like-for-like (lfl) sales, posting a decline of 1.7%, and the company reported a record 29.5 million customers in the week before Christmas. The shares spiked up in early trade, but, after the market had digested analyst commentaries, soon went into reverse and are changing hands at around 230p, as I write.
The City tends to focus on lfl numbers, and this mornings Q&A conference call with analysts opened with a question from bull broker Berstein. Analyst Bruno Monteyne wondered whether the Q3 1.7% lfl decline concealed an improving trend through the quarter, and queried whether the Christmas weeks might even have seen no lfl fall at all.
Sainsburys management declined to break out the weekly numbers, but scotched the idea of an improving trend by saying the lfl performance was pretty even through the whole quarter. Furthermore, the company reiterated its expectation of a lfl fall of 2% in Q4.
There was plenty more for bears and uncertain neutrals to get their teeth into. While Sainsburys reported impressive 16% growth in convenience sales in the trading update, Exane analyst John Kershaw elicited on the conference call that the lfl number was an unspectacular just over 3%. Similarly, Morgan Stanley analyst Edouard Aubin elicited that behind online sales growth of 6%, the contribution to the lfl performance was just 0.1% compared with 0.3% in previous quarters.
The impact on Sainsburys of the 300m price-cut salvo fired by Asda yesterday was another hot question. I wasnt altogether convinced by Sainsburys reply, which brushed off recent moves by Asda and others as promotional activity dressed up as price cuts.
Sainsburys vulnerability in a price war, which is looking likely to escalate under new Tesco chief executive Dave Lewis, is at the core of negative analyst sentiment. Tescos scale, Asdas efficiency and Morrisons vertical integration, mean Sainsburys could struggle to control its own destiny in the prevailing competitive environment.
Certainly, this is the view of veteran retail analyst Clive Black, of Shore Capital, who has long had a sell tag on Sainsburys. He painted a grim picture in a note today:
Following the November strategic review we materially cut our EPS expectations for Sainsburys FY2015 by 18%, the second cut of the current year, and our FY2016 estimate by 31%. All in all, we now forecast that EPS will decline by 25% compared to the FY2014 level by FY2018. With dividend cover reset to 2.0x dividends will fall on an ongoing basis too if the company meets our expectations.
Furthermore, Black added:
We are concerned that Sainsbury could be subject to further downgrades if trading does not stabilise soon against any potential Tesco recovery. As such we are low in confidence that our present downgrades represent the end to the present cycle SELL.
Even analysts who are neutral on Sainsburys, see little prospect of a change in market sentiment (and, thus, any significant re-rating of the shares) for the foreseeable future. Barclays said this morning:
We think that Sainsbury will have to continue delivering better lfl sales for the whole of this year (and possibly beyond) before the market will give credit to the possibility that the company has a sustainable sales edge. We reiterate our Equal Weight rating and 250p price target.
Sainsburys chief executive Mike Coupe opened this mornings conference call by wishing everyone a Happy New Year. Unfortunately, if the weight of City analysts are right, 2015 wont be a vintage year for Sainsburys.
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