Sainsbury s shares rise to key boundary on static sales rate

Updated 1216 PM BST

 

It was another disappointing quarter for Sainsbury’s sales, the sixth in a row.

A potentially greater worry for investors in Britain’s No.3 supermarket were increasing signs that measures it put in place to regain market share from established rivals and the discounters failed to show much effect in the first quarter of 2015.

The reading from its critical retail sector pulse check—same-store sales—those from stores open more than a year and typically excluding fuel sales, showed further slippage into red of 2.1% year-on-year compared to the 1.9% fall in Q4.

 

 

‘Totally’ weak

A mild positive, and one of the reasons the stock avoided falling off a ledge at the open on Wednesday, was that gross or ‘total retail sales’ were 0.6% lower—an improvement from the 1.5% fall in the prior quarter.

But even this silver lining had a cloud because including fuel sales total retailing was actually a much worse 2.3% weaker in Q1 compared to the 1% fall last time.

At this point it’s worth reminding ourselves that Sainsbury’s, like all its major supermarket peers, is now dealing in such marginal sales values that we must take comparable performance with a pinch of salt.

Suffice to say that if Sainsbury’s is making progress in recapturing consumer loyalty, that progress is currently not easy to detect with the naked eye.

 

 

“Confidence” returns

Sainsbury’s itself insisted in its statement this morning that it was “confident” it was “building on strong foundations and making good progress” with its strategy.

 

Strategy recap

o   lower dividends;

o   fewer store openings; to fund £150m worth of:

o   product investments

o   expansion in non-food; online and ‘convenience’

 

The comments,  made by CEO Mike Coupe, appeared to be his most optimistic for months, even if he didn’t deviate that much from his downbeat mantra on sales during the last several months.

“Trading conditions are still being impacted by strong levels of food deflation and a highly competitive pricing backdrop,” he said.

But Sainsbury’s also noted ‘convenience’ stores—including those run in partnership with Netto—had growth in double digits.

Also that clothing sales rose more than 5% and overall volumes and transactions painted a firmer picture in keeping with the strengthened UK consumer environment seen over the last few months.

 

 

Premium at the margin

These segmental gains come on top of further ‘premium factors’ that boosted Sainsbury’s stock on Wednesday.

Many were already evident some weeks ago, in data showing Sainsbury’s came out on ‘top’ among ‘The Big 3’ supermarkets in a regular market share survey by research firm Kantar Worldpanel.

Sainsbury’s sales fell 0.2% in a 12-week period that ended on 26th April, said Kantar, compared to a 1.1% fall at Morrisons and a 1% decline at Tesco. (Waitrose was the only UK-based group whose sales rose during the period; +1.5%).

In Kantar’s most recent survey, released earlier this month, Sainsbury’s was second amongst the Big 3, with a fall of 0.3%, whilst Morrison’s was first with a 0.1% rise in the 12 weeks to 24th May.

Management comments to the press later on Wednesday morning were also notably more cheerful than many I recall being uttered following Sainsbury’s prior quarterly release.

• Online grocery sales growth was 6%, volumes up 11.6%
• Items per basket flat in Q1
• Q1 convenience store sales grew c.11%
• Expressed confidence in their ability to outperform supermarket peers— pledging to “match whatever our competitors throw at us”

This leaves us with a picture for Sainsbury’s progress that remains nebulous, with progress during the quarter limited to specific niches and frankly, potentially vulnerable.

Note that management this morning reiterated their view for food prices to remain deflated for the rest of the year, and maybe during next year too.

Additionally, Kantar’s UK supermarket sales report showed growth dipped to a rate of 0.2% year-on-year in the recent 12-week period.

That reminds us that whilst consumer retail sales growth is currently heightened, it is going hand in hand with historically weak price inflation.

 

 

Shares rise to challenge

But is there now room to begin to see if not Sainsbury’s first signs of an uptick from its doldrums, at least the best conditions that could bring that about?

The gradual addition of gains by the stock this morning tells us that investors incrementally concluded that Sainsbury’s may have indeed laid down stronger foundations than it had in recent quarters.

That’s not to say that retail investors are returning to the ‘easier to impress’ phase they displayed earlier in the year.

Sainsbury’s share price chart shows investors have afforded the stock little favour over the last several months.

SBRY’s fall of 15% since April is the same as the one posted by Thomson Reuters’ UK Food and Drug Retailers sector index, and about 5 percentage points less than the fall of Tesco shares during the same period.

In the year to date, share prices of the Big 3 performed within a few percentage points of each other.

 

 

 

 

Key

SBRY – SAINSBURY’S

TRXFLDGBN31 – THOMSON REUTERS UK FOOD & DRUG RETAILERS STOCK INDEX

MRW.L – MORRISON’S

TSCO – TESCO

 

In Sainsbury’s case, it is worth remembering that for several months this year, it has been the most shorted stock in the benchmark FTSE 100 index.

The stock held a similar distinction when I wrote this article, back in February.

Data provided by Markit suggested that around 16% of SBRY stock was on loan by the close of trading on Tuesday.

Morrison’s was close behind, whilst Tesco has also retained a persistent level of short interest since last year.

Therefore some of the gains by Morrison’s, Sainsbury’s and Tesco’s shares on Wednesday can be attributed to short covering.

That could make Sainsbury’s stock vulnerable to a fall back to levels seen earlier in the week in the near term.

 

However, for now, the near-term outlook for the stock looks more constructive than it has for weeks, raising a significant challenge almost directly overhead, namely the failed rising trend line stemming from January.

The trend would present 262p as a first hurdle and the stock is likely to meet it during the next few sessions at most.

If SBRY can get above it, we will be able to say investors have taken Mike Coupe’s “confidence” cautiously to heart.

So long as his firm can at least maintain the current marginal rate of quarterly decline (preferably much better, and definitely not worse) a greater magnitude of share price comeback is likely.