Sainsbury s slightly up following latest update

Sainsbury’s bounced back somewhat (currently slightly up), following a bit of a decline earlier today (18^th March) on the back of the company’s latest trading statement, which showed a decline in sales in the company’s fourth quarter.

The company reported a decline in total sales for the fourth quarter of 1.5% (a 1% drop excluding fuel).  Meanwhile, like-for-like sales in the quarter fell 3.8% (down 3.1% excluding fuel).

Yes, the decline breaks a long stretch of growth at the company but it was of no real surprise. 

Indeed, expectations were that the company would post sales declines, with expectations albeit somewhat less as tough conditions faced by the top players in the sector – exacerbated by so-called discount retailers – continue to take their toll.

Of some encouragement, of course, was the fact that the company managed to hold on to its market share (17% in the 12 weeks ending 2^nd March 2014, according to research firm Kantar Worldpanel).

That’s in contrast to rivals Tesco, Asda and Morrisons, all of which have ceded market share recently, according to Kantar.  The latter retailer, by the way, sparked something of a sell-off across the sector last week, following the company’s profit warning.

Despite the well-known challenging conditions, which are set to continue, Sainsbury’s outlook seems relatively optimistic. 

The company boasted good performance in its clothing business (menswear to be precise) as well as growth in its own-brand products, which it claims are significantly ahead of branded equivalents and are on average 20% cheaper.

Looking ahead, Sainsbury’s reckons that its “differentiated offer, supported by ‘value for values’” will help the company outperform its peers in the years ahead.

Well, that might well be the case.  One thing is clear, however, as challenging conditions remain, the company’s top-line is undoubtedly set to remain under pressure.

That means that for Sainsbury’s to maintain sales – given recent news flow from rivals regarding ramping up competition on price – its margins are bound to suffer.  It’s worth highlighting that the company already has comparatively thin margins; for example, it has a five-year average EBIT margin of 3.8% versus heavyweight Tesco’s 5.4%.

Of course, given the company is also feeling the chill of a slowdown in the sector, Tesco’s margins are likely to dip.

Meanwhile, Sainsbury’s debt levels (net debt of around £2.2bn as at September 2013), which have been gradually increasing over the years, partly due to investments, certainly warrants close attention, given elusive growth.

Still, for now, the company seems better placed than some of its aforementioned competitors.  That said, while signs might well indicate a return to growth in the long term, the company’s shares, and indeed those of its rivals, are likely to remain under pressure near-term as the shakeup in the sector persists.