Sainsbury 8217 s share recovery hampered by downbeat statement

Supermarket investors raising the bar again

Judging by supermarket share price performances over the last few months, it would have been fair to assume investors were happy to stage significant relief rallies based on relative rather than absolute sales strength.

But the modest rise by Sainsbury’s shares this morning--as little as 0.5%–after it beat expectations for key like-for-like sales with a fall of ‘just’ 1.9%, suggests investor attitudes might be hardening up again.

The market was expecting a like-for-like sales slide of as much as 2.7%.

In the event, the fall just short of 2% still suggests little progress was made by Britain’s No. 3 supermarket since its third quarter, when LFL sales fell 1.7%.

But the marginal nature of such a quarterly deterioration is the kind of slippage that the supermarket sector has shrugged off of late, judging by gains of between 25%-50%-plus by the ‘Big 3’s shares since the third half of 2014.

A thin slice

The main sticking point for a proper relief rally today is that Sainsbury’s has made little effort in its statement to suggest its turnaround efforts are gaining deeper traction beyond a positive reception from customers.

It does state that a “Positive response to price investment” (AKA price cuts) is becoming evident, “as volume and like-for-like transactions increase”.

However the balance of headline commentary by the supermarket specifically about  its market outlook is definitely on the more pessimistic side.

Choice downbeat comments include that Sainsbury’s

• Expects its market to remain “challenging for foreseeable future”
• Says food deflation likely to persist for rest of this year, competitive pressures on price will continue

Elsewhere, Sainsbury’s CEO, Mike Coupe, who is quoted extensively in the trading statement assessed the performance of Sainsbury’s fight back strategy more positively.

• “Our price position relative to our major competitors has never been stronger”
• “We have seen volume growth across the food business and an average uplift of over three per cent on the 1,100 products where we have made price reductions.”
• ‘Value Simplicity Programme’ “well received by our customers”
• “Like-for-like transactions” grew during the quarter
• Expects to “outperform…supermarket peers”

A little later this morning, Coupe stated in comments to the media that he did not expect analysts’ full-year pre-tax profit consensus of £659m to change—in fact, that already reflected a marginal fall compared to current consensus forecasts compiled by Thomson Reuters.

Obviously that can be read either negatively or positively.

But it’s worth noting that average analyst expectations for pre-tax profit gathered by the data provider and updated frequently, stood at £662.04m as this article was going online.

Therefore, Coupe was in fact guiding the market slightly lower—a ‘profit warning’, if you like.

Albeit one that is perhaps not worth bothering ourselves too much about.

253p turns magnetic

Still, the signal disparity suggested between Mike Coup’s expectation of where pre-tax profit will land and where the market sees it falling, may suggest the risk of at least a slightly deeper fall than even £662m should not be ruled out.

Add in that the CEO also said food price deflation in the quarter was estimated at 2.5%, then in my view, there is little reason to look for a material recovery in Sainsbury’s sales or profits during at least the first three quarters of 2015.

On that basis, excepting any further spotlight on operational factors from Sainsbury’s C-Suite later this morning, today’s trading statement ought to be taken as moderately negative overall.

My base case in the event of deterioration in sentiment, one which I had hoped could be avoided, is that the shares could trend back toward a medium-term pivot close to 253p.

Sainsbury’s has avoided the worst-case scenario of a sharp deterioration in headline quarterly sales, and therefore has probably escaped the clutches of the hedge funds that shorted it more than any other supermarket stock over the last month or so.

That means the stock is unlikely to suffer a sharp near-term tumble.

But, with Sainsbury stock having lost about 9% in the last week of its circa-25% rise off December lows, the downside could still be more compelling over the next few weeks.

The stock is currently testing a putative support area close to 271p.

 A weak rise at best for the day

In the shorter-term time frame which is the typical focus of City Index clients dealing in Sainsbury’s Daily Funded Trade, the title continues its week-long struggle to re-establish itself within the standard deviation channel it entered in January.

The base of the channel is currently around 269.

Failure would obviously not be promising.

Attached trading systems provide mixed signals—actually, that’s because the focus of their timeframes vary.

Both utilise moving averages (MA).

But paradoxically, one which is based on key Moving Average Convergence Divergence (MACD) concepts takes a slightly longer-term view than the ‘Slow Stochastic Oscillator Reversal Cross System’.

The longer-term MA in the MACD system is 26 periods (half-hourly in the chart shown), whilst the longest MA of the stochastic-based system is 14 periods.

Therefore the stochastic system is more ‘sensitive’ to short-term changes in sentiment.

It triggered a ‘long exit’ signal on Monday afternoon, which has not been negated, because in principle, Sainsbury DFT remains overbought seen in a half-hourly view.

The fact that the MACD system suggested buying the trade just an hour and a half before the stochastic one said sell on Monday, and that the MACD signal wasn’t negated either, adds a positive element to near-term trading prospects.

These could be assisted if the median area of the channel, currently around 278, were to be retaken.

By my view remains that the nominally and practically overbought status of MACD and Slow Stochastics respectively will tend to rule out major upside for the day and even for the medium-term.