Sainsbury sees recovery signs

Wed 11 Nov, 2009 16:01

By Mark Potter

LONDON (Reuters) - Grocer J Sainsbury (SBRY.L) posted a forecast-beating 19 percent rise in first-half profit and said it saw signs of a pick-up in spending, though industry growth would be curbed by lower food price inflation.

Chairman David Tyler played down speculation the company's biggest shareholder, the Qatar Investment Authority (QIA), might make a fresh takeover bid after a failed attempt in 2007.

"There's no suggestion whatsoever that it (QIA's attitude) has changed from what it has been over the last 12 or 18 months, which is wishing this business well and being a long-term shareholder," he told reporters on Wednesday.

Sainsbury, Britain's third biggest grocer behind Asda and market leader Tesco TSCO.L>, said profit before tax and one-off items rose to 307 million pounds in the 28 weeks to October 3, beating the average forecast for 301 million in a Reuters poll.

Growth was driven by an 800,000 increase in weekly customer transactions to 18.5 million, as well as strong sales of non-food ranges and tight cost management.

Chief executive Justin King also fleshed out Sainsbury's plan, announced with a 432 million pound equity fundraising in June, to accelerate growth by expanding outside its stronghold in the south and east of England and into more non-food ranges.

The group expected to create 10,000 jobs in the two years to March 2011, he said.

"What comes through is how much the model has developed over the last five years and the opportunities that lie ahead whether in food, new space, non-food or online," said RBS analyst Justin Scarborough, keeping a 'buy' rating on Sainsbury shares.

At 3:45 p.m., the shares were up 3.4 percent at 338.7 pence, outperforming a 0.1 percent rise on the DJ Stoxx European retail index .

Some analysts, however, were concerned by data from market researchers TNS and Nielsen which showed Sainsbury's growth slowing versus industry leader Tesco (TSCO.L) and far behind upmarket rival Waitrose .

"Although the interim results came in at the top end of expectations there will be some nervousness arising from the company's recent sales performance," said Seymour Pierce's Freddie George.

Asda was due to report third-quarter sales on Thursday.

A STRONG CHRISTMAS

King said it was too early to know whether a sustainable economic recovery was taking hold and sales growth at grocers would be held back by falling food price inflation.

Food price inflation would be negligible in the second half, though deflation was unlikely, he told reporters, echoing comments from rivals like Tesco.

"The early signs are that as the pressures are coming off the weekly household budget that some of that savvy shopping, where people bought cheaper items to manage their weekly shopping costs, has already started to trend back," King said.

"We think Christmas will be strong on food ... and there's every reason to suppose non-food will be quite strong," he said, forecasting shoppers might bring forward purchases ahead of an expected rise in VAT sales tax on January 1.

Sainsbury, which runs over 500 supermarkets and about 300 convenience stores, hiked its interim dividend by 11.1 percent to 4 pence and said the estimated value of its properties had increased by 1 billion pounds to 8.5 billion.

Credit Suisse analysts forecast a 1-2 percent rise in the full-year consensus profit forecast which is 589 million pounds, according to Thomson Reuters I/B/E/S.

But they said good news was priced into the stock, which trades at 13.2 times forecast earnings for next year, above Tesco on 12.8 and Wm Morrison Supermarkets (MRW.L) on 12.5, according to Reuters data.

Despite their premium rating, Sainsbury's shares have underperformed the DJ Stoxx European retail index by about 15 percent this year as investors bet a recovery would drive stronger growth at sellers of discretionary goods.

An industry survey on Tuesday showed British retailers enjoying their best October for seven years.

For a graphic showing the impact on grocers of food price inflation please click on:

(Editing by Dan Lalor and Jon Loades-Carter)