Sainsbury’s set for tough 2015

Sainsbury’s will release its Q3 sales and revenue report on Wednesday 7 January.

A man walking by a Sainsbury's branch
Source: Bloomerg

Last year was a difficult one for the UK supermarket sector and Sainsbury’s was no exception. The company announced its first quarterly drop in like-for-like sales in nine years then it followed that up with a first-half loss of £290 million.

Sainsbury’s customers are a good example of the squeezed middle that defected to deep discount retailers like Lidl and Aldi and haven’t looked back since. The high and low ends of the supermarket spectrum are gaining market share while Sainsbury’s is stuck in the middle of the price war.

The firm has penciled in £150 million worth of discounts across its products and in doing so it kept its interim dividend unchanged. In terms of cash payouts the dividend remains the same, and the company pledged to keep the dividend cover constant. If profits decline we can expect the dividend to be lowered in line with it.

Mike Coupe, who took over as CEO in the summer, has outlined cost-cutting plans to the tune of £500 million between now and 2017. Capital expenditure will be cut by approximately 40% and the size of new stores to be opened this year will be reduced by 33% in terms of square feet. Sainsbury’s is adjusting to the new pattern of consumer habits which is moving away from large scale supermarkets and flocking towards convenience stores and online business.

According to IGD, the UK discount grocery business is expected to double in value to £20 billion in the next four years. Sainsbury’s is testing the water in the discount sector by setting up a joint venture with the Danish group Netto. A total of 15 shops were opened in the north of England at the back end of last year, and if they are a success more will come.

It is encouraging to see that the grocer is adapting to the new consume climate, but I feel the company won’t see the benefit in the near term which leads me to believe the share price will continue to struggle.

The retailer will announce its full-year figures in May, and traders are expecting revenue of £23.98 billion and adjusted net income of £501 million. The forecasts represent no change in revenue and a 20% decline in adjusted net income.

First-half figures exceeded market estimates. Revenue came in at £12.66 billion and EPS 14.5p respectively, while analysts were anticipating figures £12.61 billion and 13.7p. Sainsbury’s will report its second-half figures on 5 May, and traders are expecting revenue of £11.13 billion and EPS of 11p.

Investment banks are bearish on Sainsbury’s, and out of the 24 ratings, five are buys, nine are holds and 10 are sells. The average target price is 248p, which is 3.7% above the current price.

Equity analysts are not as bearish on its competitor Tesco. Out of the 26 recommendations, four are buys, 15 are holds and seven are sells. The target price is 178p, which is 4.4% above the current price.

Investment banks hold a relatively bullish view on Marks & Spencer Group as 43% of the ratings attached to the stock are buys. Ordinarily having less than half of the ratings on a stock as a buy is a negative indicator, but it highlights how sceptical analysts are of the British supermarket sector.

Sainsbury’s has suffered at the hands of short sellers, and according to Markit over 15% of the stock in the company is on loan to traders shorting the company. The supermarket has the highest percentage of short sellers of any company in the FTSE 350.

The stock has been in a downward trend since November 2013, and my target is 220p. If the grocer manages to beat estimates the share price is likely to run into resistance at the 100-day moving average of 257p.

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