Sainsbury's plc (LON:SBRY) files a trading update on Wednesday next week with figures for its first quarter trading for the 2016/17 year and HSBC isn't very upbeat about its potential contents. It says the stock appears affected by downward momentum as underlying sales are falling at a crucial time. It repeats a 'reduce' recommendation and 200p price target, compared to a current share price of 249p. Sainsbury's is one of the 'big four' supermarkets and increasingly has been squeezed by the rapid growth of no-frills rivals such as Aldi and Lidl at the bottom of its price range and upmarket competitors such as Waitrose at the top end.
Fierce competition blamed
Earlier this month, annual results for the year to March 12 made for grim reading as it blamed fierce competition on the high street for lower profits. Underlying profits dropped by 14% to £587mln as sales slipped by 1.1% to £25.8bn. Like-for-like sales were 0.9% lower. The results were well below analysts’ forecasts of underlying profits of around £613mln on £23.5bn of revenue and shares fell 3%. There was little comment about the £1.4bn Home Retail acquisition even though its main business Argos reported a recent 36% fall in profits and investors on Wednesday will be looking for a better read on the acquisition. HSBC said it expects the latest first quarter like-for-like (LFL) sales to be down around 2% (based on Nielsen data), which would make two year-LFLs down over 4%, among the worst on record for Sainsbury. "It appears Sainsbury’s move away from promotions and Brand Match is hurting sales. The issue is compounded by a slowing opening programme and a lower contribution from maturing space," it said. "We expect total sales (ex fuel) to be down c1%, although this would represent some volume growth after stripping out deflation. We find it concerning that key dynamics are turning against Sainsbury at this crucial time, as it prepares to integrate Argos.
Expect a difficult second half
The bank warns to "expect a difficult second half". "We expect competition to intensify in the second half as ASDA fights back and as Tesco increases the pressure, using its improving momentum and volume growth to accelerate around the virtuous circle. "We believe that a sustained Tesco recovery will hurt Sainsbury and that it could become the loser in the sector. "It lacks the scale of Tesco and has a weaker balance sheet than Morrisons. We do not believe Argos is a good strategic fit and think that it will be a distraction at a crucial time." The Share Centre however does rate shares a 'buy', saying that given the fierceness of competition in the sector, Sainsbury’s continues to perform relatively well, with market share currently at 16.5%. "As the group reported results in May, there is unlikely to be much in the way of new news for investors. The trading environment is likely to have remained tough and the expectations will be for that to be the case for some time yet. Investors should expect further comment on cost savings and the Home Retail acquisition." As well as SRBY next week, we have as traffic update from low budget carrier easyJet (LON:EZJ) and a trading update from housebuilder Bellway (LON:BWY) and Imperial Leather maker PZ Cussons (LON:PZC). The latter on Friday was downgraded to 'hold' from 'buy' by Canaccord. The broker noted that since the interims of January 26, Cussons shares have risen 37%, helped by a 57% rise in the oil price and outperforming the FTSE 250 index by 31%. “We think risk from the scheduled full year trading update on 9th June is no better than equally weighted (with April's update stating that performance ‘overall...has been in line with expectations’), and would take profits in the light of the re-rating and the lack of a near-term catalyst," it said.
Significant announcements expected
Tuesday June 7 Full year earnings - Carclo PLC (CAR), Iomart Group PLC (IOM) Wed June 8 Interims - Shoezone Trading update - WH Smith PLC (LON:WHST), Sainsbury (J) PLC (LON:SBRY) Thurs June 9 Full year - FlyBe (FLYB), Wincanton, Auto Trader Group Trading statement - PZ Cussons (LON:PZC), Bellway, Home Retail Group plc (LON:HOME) Friday June 10 Full year - Fuller Smith & Turner PLC (FSTA)