Flash in the pan
Sainsbury’s flash in the pan in the first-quarter—a 2.3% rise in underlying sales growth—has, almost predictably, fizzled out. Or put another way, although Argos gained market share in the half year, according to Thursday morning comments by CEO Mike Coupe, it was called on to do more heavy lifting than was possible to offset parlous growth at the supermarket. Additionally, whilst ahead of pessimistic forecasts, £251m interim profits were 9% lower on the year, a deterioration of the 8.2% pre-tax decline seen at the last full year. Sainsbury’s, like almost all high street businesses is caught in a pincer of rising input costs and falling consumer real wages growth. It is keeping prices low, but, unlike chief rivals Tesco and Morrisons, there’s something wrong with its mix of store prices and supplier agreements, because the UK No. 1 and No. 3 in market share terms, are reporting definitively firmer underlying sales growth, whilst Sainsbury’s key sales retreat.
The lack of an upturn in Sainsbury’s worsening metrics in H1 pushes investors back on its long-term faults. These include profit growth below the FTSE average, revenue growth barely above inflation, a long-term capex profile that continues to exceed profits and liabilities (including pensions) that remain stubbornly demanding. Mike Coupe is “confident” in the group’s “Christmas offer”. It will need to be stellar to prevent Sainsbury’s 8% share price slide this year from worsening, which seems all but inevitable on the strength of the group’s performance so far.
TechnicalsSainsbury’s investors have learned not to get too attached to the upside. Like Tesco, the shares have given up a hefty chunk of the rebound seen following the end of a supermarket crisis between 2014 and 2015. Now, the stock is again trading below its important 200-day moving average (MA) and last week lost its grip 0n the topside of another popular tool for technical traders, the 21-day exponential MA. The chances of a significant abatement of the shares’ falling trend are significantly reduced whilst it trades below these trend indicators. Regarding that trend, price has corroborated a specific declining line by tagging the top of it twice since February (if we include Thursday’s skim with a halfpenny of an intersection with the line). A definitive breach will see the pace of the fall quicken (volatility) though continued touches and contained reversals on the top side of it will also be bearish. Support has been evident between 220-224p since August 2016, ahead of kickback lows around 211p and 212p on the day after the Brexit vote
Figure 1 - Sainsbury Plc. share price chart
GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.
No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.