Sainsbury’s is still suffering

The supermarket will reveal its full-year numbers on Wednesday 6 May, and is expected to post its first decline in annual profits in a decade. 

Sainsbury's sign
Source: Bloomberg

Sainsbury’s is still struggling to stem the advance of deep discount retailers Lidl and Aldi, and is expected to reveal a 17% decline in full-year pre-tax profits this week. The firm announced a 1.9% drop in fourth-quarter like-for-like sales, which compares with a 1.7% drop in the third quarter.

Sainsbury’s is getting stuck into the price war with the rest of the UK retailers; the firm revealed a £150 million price slashing plan last year, which included improving the quality of 3000 of its own brand products. In order to pay for these price cuts, the company will reduce its costs over the next three years to the tune of £500 million, and capital expenditure will also be curtailed. It needs to streamline its structure if it wants to survive the supermarket price war. Your typical Sainsbury’s customer is a good example of the so-called ‘squeezed middle’, and these savvy shoppers will easily change allegiances for a bargain, so Sainsbury’s must stay ahead of the curve. 

The benefits of the company’s restricting will not be evident for a number of quarters to come, and in the meantime the battle to keep in step with its competitors for price reductions is crushing its margins. The company’s dividend is safe for now, but that could all change if the grocery sector remains gloomy. Approximately 13% of Sainsbury’s shares are out on borrow to short-sellers, according to Markit, as speculators are taking note of the 20% share price drop in the past 12 months.

When Sainsbury’s reports its full-year figures, traders are expecting revenue of £23.9 billion and adjusted net income of £503 million. These forecasts represent no change in revenue and a 19% drop in adjusted net income. The grocer will also announce its second-half numbers on the same date, and the market consensus is for revenue of £11.12 billion, and this compares with the first-quarter revenue of £12.66 billion.

Investment banks hold a moderately bullish outlook on Sainsbury’s, and out of the 25 ratings, seven are buys, nine are holds, and nine are sells. The average target price is 250p, which is 7.7% below the current price. Equity analysts are more bullish on Tesco; out of the 26 recommendations, ten are buys, 11 are holds, and five are buys. The average target price is 244p, which is 7.7% above the current price.

Sainsbury’s share price has been rising since December, and the 200-hour moving average is providing support at 270p. If that level is held the resistance at 280p will brought into play, and a move through that mark will make the recent high of 288p the target. If the 200-H MA is punctured the 100-DMA will be the next level of support at 260p. If that level is taken out then 255p will be on the radar. 

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