Tesco eyed after Sainsbury’s joins price cutting trend

Sainsbury’s is the first major retailer to upgrade its profit forecast after Christmas sales

No Christmas break from retail ‘challenges’

Sainsbury’s offered the first full-year forecast upgrade from a major retailer following all-important Christmas sales, joining Morrisons with slight like-for-like beat. The group’s stock is up but the market reaction is well short of euphoria. Sainsbury’s also sidestepped the pincer movement of input price pressure and pricing competition over the period overall, but it didn’t soft pedal continued “challenging” conditions keeping the group “cautious” about the year ahead. Additionally, the base for its modest profit guidance lift was undemanding. The new forecast of £559m remains slightly below some market forecasts and all still project a third consecutive annual decline.

Growth in all the right places

Group sales performance had highlights and lowlights too. Growth outside of supermarket stores was a plus. A 20% online grocery sales rise was in step with firm results expected at rivals, whilst convenience stores continued to do brisker trade than larger locations, suggesting Sainsbury’s selling space mix is on track. Earlier vindication of the group’s Argos gambit may be fading though. Sainsbury’s said it won market share in general merchandise over the festive season but like-for-likes retreated 1.4%. That’s slightly better than 1.6% fall in Q2, but still points to margin surrender. Meanwhile, key non-food rivals are staging a return to full-price sales growth, for instance Next. And one reason why Sainsbury’s general merchandise is highlighted is because its underlying food sales are now a black box. It’s sensible to suspect Sainsbury’s like-for-like grocery trend continues a multi-quarter negative trend though, even if seasonal volumes rose. Either way, regardless of traction coming through in other businesses, Sainsbury’s still generates most revenue from groceries, and profits cannot recover before food sales growth resumes.

Grocery grind continues

More broadly, with the price of staples looking permanently lower, established grocers’ cost structures have still not caught up enough.  It was little surprise to us that the Big 3 supermarket shares dawdled in 2017, despite progress in erecting sustainable defences to renewed challenges. Focus now moves on to Britain’s largest retailer, Tesco, which will release a seasonal trading update on Thursday. Anecdotal reports of significant discounting across categories suggest volumes will rise. The group also shows little sign of coming off track relative to its 2020 goal of earning 3.5-4 pence from every pound spent by shoppers, up from 2.3p in 16/17. In the nearer term however, disappointment is possible if the group went all in with the price cutting melee that ensued over Christmas, reducing chances of underlying sales growth in Q3. Weak same-store advances will keep the shaky start to the year for grocery shares going (A 2.1% rise vs. the comparable period is widely expected for Tesco.) More importantly, confirmation that major retailers really have started the New Year with low-quality revenues will keep them on the back foot.

Technical analysis for J. Sainsbury’s

From a technical chart stand point Sainsbury’s shares are in a rising trend. It has to be said though that trend from November lows looks similar to repeated attempts by the shares to gain ground over the last three years. All of these failed at or somewhat below 294.4p, the shares’ best price since September 2014. Indeed, the current up leg is well below the peak of an advance commencing July 2016 that failed at 283p last May. Hence the shares have remained in a 70p range for around 27 months. There’s certainly room toward the upper bound of that range currently, and momentum is on the upside as short-term trends remain favourable. The stock has swung above its rising 21-day exponential moving average line (the red dashed line in the chart below). The shares are now challenging resistance around 256p-260p which capped late-June/early July rises. A break would not surprise. A break of the more important range would.

Figure 1- J Sainsbury Plc. technical price chart – daily intervals

Source: Thomson Reuters and City Index

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