Shares in J Sainsbury (SBRY) took an astonishing 14 per cent leap on the day the supermarket chain’s second quarter trading update was published. Total sales nudged up 0.3 per cent following declines in both the first quarter and the financial year to 14 March. Like-for-like sales fell 1.1 per cent - better than the declines of around 2 per cent registered in previous periods. Best of all, underlying profits for the year are expected to be "moderately" ahead of market expectations.
What's new:
■ Like-for-like sales down 1.1 per cent
■ Full-year profits due to beat expectations
Chief executive Mike Coupe admits the market is still challenging, with food price deflation still a major drag for the sector. Yet both volumes and the number of transactions rose during the second quarter, while the decline in average spend per basket has stabilised. Widespread promotional activity is also shrinking in favour of lower regular prices.
Unlike its competitor Wm Morrison (MRW), which has now exited the convenience market, Sainsbury’s opened 27 new convenience stores in the quarter. Online grocery orders also grew at a rate of over 15 per cent, with customers able to collect shopping from 52 Click and Collect sites. The launch of the Tu clothing website also got off to a good start with the first six weeks of trading "significantly exceeding expectations". Clothing sales grew by nearly 13 per cent in the quarter, helped by a successful "back to school" marketing drive.
Charles Stanley says…
Neutral. Sainsbury's appears to be surviving better than rivals the price war sparked by the arrival of discounters Aldi and Lidl. The market interpreted the statement as being more optimistic than previous updates, prompting some short-sellers to buy back the stock to close out their positions. However, the rally in the share price is from a very low valuation. Like-for-like sales have now fallen for seven consecutive quarters. Also, the consensus forecast that was slightly upgraded was for a near-20 per cent fall in pre-tax profits from last year’s £681m.
Shore Capital says…
Hold. Sainsbury's has surprised us and the market, and we tentatively upgrade from sell. We would not expect the company to raise guidance if it were not significantly more confident about achieving such a result. However, the UK grocery market remains a competitive and potentially volatile sector. On the topic of the National Living Wage, Sainsbury's has worked to better reward, motivate and retain staff for some time, and says it expects to be fully compliant with the new laws. Mr Coupe said he expects rising disposable incomes to benefit the whole trade, even though rising real incomes have only achieved this modestly so far. Expect EPS of 21.9p for the year to March.
