Sales slip stalls resurgent Sainsbury’s

Another stuttering sales performance from Sainsbury's will do little to bolster its lowly valuation versus resurgent rivals Morrisons and Tesco.

A 0.5% decline in supermarket like-for-like sales for the nine weeks to March 11 was weaker than some analysts had forecast, dashing hopes that a brighter Christmas performance would signal the start of some trading momentum.

Admittedly, underlying sales at recent acquisition Argos continued to surprise on the upside following a 4.3% rise, but this was achieved thanks to strong demand for lower margin categories such as mobile phones and wearable tech.

Having impressed investors with their recovery efforts, valuations for Tesco and Morrisons now appear demanding at a reported 19 times and 20 times earnings estimates for 2018, respectively.

Less so Sainsbury's, which is rated at around 13 times based on Barclays analyst's recent earnings per share (EPS) forecasts for 18.9p in the year to March 2018. Look for double-digit growth the year after to 21.1p, says Barclays.

It's also worth remembering that Sainsbury's dividend yield is likely to remain higher than Morrisons, while Tesco is not currently taking a dividend break.

But what investors crave on Sainsbury's is some visibility, something that is hard to come by when a weak pound is putting so much pressure on the price of imported food and ingredients.

Chief executive Mike Coupe describes the market as "very competitive", adding that the impact of cost price pressures remains uncertain.

This echoes Kantar Worldpanel's recent data showing food price inflation doubled to 1.4% for the 12 weeks to 26 February. Staples such as butter, tea and fish all saw prices rise by more than 5%, while fruit and vegetables – many of which are imported – also saw an uptick in price.

Kantar said Sainsbury's market share slipped by 0.3 percentage points, leaving the UK's second biggest grocer with 16.5% of the market. Tesco is on 27.9%, with Asda holding 15.7% and Morrisons holding firm at 10.6%.

Since the end of 2015, Sainsbury's shares have lagged Tesco and Morrisons, with the distraction of its £1.4 billion bid for Argos-owner Home Retail one factor holding back performance.

At least the takeover, which is still questioned by some analysts, is playing out well so far.

Coupe said Argos had delivered another strong quarter, having benefited from digital investments in order to improve service and availability, as well as to enhance the Argos website and app.

The number of Argos stores reduced during the fourth quarter by 11 to 712, but this was offset by a rise in the number of outlets within Sainsbury's shops.

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