Sainsbury is edging lower ahead of its latest trading update due at the end of September, despite recent market share data showing that it is outperforming rivals.
Analyst David McCarthy at HSBC has cut his profit forecasts for the supermarket, given deflation, increased competition and other cost increases. Issuing a note with a reduce recommendation and 200p price target, He said:
Ahead of the second quarter statement....we are cutting pretax profit by 6% for this year, 9% for next year and 16% for 2017/18. We now expect profits to fall for the next three years as Sainsbury and the industry corrects strategic mistakes over pricing and expansion made over much of the last 7 or 8 years.
We forecast the retail operating margin to fall this year to 2.5%, and a further 10 basis points per annum for the following two years. This is due to the impacts of rising costs (eg wages, pension auto-enrolment and rent rises), like for like sales declines and gross margins under intense pressure due to intensifying competition. Sainsbury’s balance sheet remains weak, with a large leasehold content compared to Morrisons, and an accompanying rent bill (around 2.5% of sales). This leaves Sainsbury strategically vulnerable in our view.
Second quarter trading likely to show improvement but this does not detract from the bigger strategic issues. Like for like sales (ex-fuel) were down 2% in the first quarter of 2015/16 and we now expect flat like for like sales for the second quarter. This is a meaningful improvement, but it is against comps that improve by 1.7%, so the two year like for like number (a measure we see growing in importance) is likely to be broadly flat. We expect total sales (ex-fuel) to be up around 1.5% for the second quarter.
Meanwhile Barclays was more positive, saying:
Although this is only a trading statement, the company occasionally makes some comment on its satisfaction (or otherwise) with the level of consensus pretax profit estimates.
We tend to think that the ongoing tough competition in the industry - combined with the recent announcement of 4% pay rises for store staff - add a clear headwind. On the other hand, better profitability on fuel - and possibly lower levels of Brand Match rebates, given a seemingly less competitive Asda - may provide some relief. We would not expect any significant profit comments at this stage.
We reiterate our equal weight rating and £2.50 target price on Sainsbury. The stock is trading on a 2016 estimated PE of 10.8 times, versus the European sector average of 15.4 times, and its most relevant peer Morrison on 14.7 times.
Sainsburys’ shares are currently down 2.4p at 226.3p.
