Citi analysts see no incremental risk to Tesco PLC (LSE:TSCO) or J Sainsbury PLC (LSE:SBRY) from Asda’s recent performance, despite challenging quarterly results.
Asda reported a 5.9% decline in first-quarter sales (excluding fuel) to £5.0 billion, with like-for-like sales falling 4.5% or 3.1% when adjusted for Easter timing. This followed a 4.2% drop in the previous quarter.
Clothing sales under Asda’s George brand increased by 1.8% (or 3.5% Easter-adjusted), while General Merchandise (GM) sales declined 3.5% (1.6% adjusted). Gross margins improved modestly, rising 50 basis points in clothing and 20 basis points in GM.
However, Asda’s net debt to EBITDA ratio increased significantly, reaching 3.4 times compared to 2.9 times at the end of the previous quarter, reflecting ongoing investment in pricing strategies. EBITDA fell sharply by 35.7% year-on-year to £164 million, impacted by substantial price cuts.
Citi notes heightened investor scrutiny on UK supermarket pricing following Asda’s aggressive pricing strategy, aiming to maintain a 5-10% price advantage over competitors.
Management confirmed Asda’s current pricing is now 3-6% cheaper than rivals, having reduced prices on around 12,000 product lines, with inflation running roughly two percentage points below its peers.
Tesco and Sainsbury shares were little changed in mid-afternoon trading.