Supermarkets giant Sainsbury's (SBRY) skips 7.2p (2.2%) higher to 337p early on as an in-line first quarter trading statement calms nerves. Despite delivering a second consecutive quarter of falling sales, the FTSE 100 giant shows it is performing better than embattled rivals Morrisons (MRW) and Tesco (TSCO) in the weakest of industry conditions.

The grocer's like-for-like sales softened 1.1% (excluding fuel) over the 12 weeks to 7 June, a disappointing outcome by Sainsbury's own high standards. The decline represents a second consecutive quarter of falling sales for the supermarket chain, which reported its first fall in sales for nine years in March, amid discount competition and cautious consumer spending.


Web chart - Sainsbury's - June 2014


However the fall was largely anticipated by the market, given sluggish industry growth and with the big four supermarkets – Tesco, Sainsbury's, Asda and Morrisons – each being squeezed by low-cost rivals Aldi and Lidl as well as upmarket chains including Waitrose and Marks & Spencer (MKS).

Moreover, Sainsbury's total retail sales grew 1% with fuel stripped out and long-serving CEO Justin King, who hands over the reins to group commercial director Mike Coupe in July, flagged a number of positive trends. These included the ongoing success of its Brand Match vouchering offer and Sainsbury's own brand Taste the Difference and by Sainsbury's ranges, as well as growing general merchandise and clothing sales. Clothing proved a star turn, delivering double digit like-for-like sales growth, while convenience sales burgeoned by 18% plus during the quarter, well ahead of the larger outlets and the important groceries online channel grew by over 10%.

Shore Capital, with sell recommendations on Tesco and Morrisons, sticks with its 'hold' rating on Sainsbury's, though the broker points out that: 'Mr. Coupe has to contend with what are aforementioned demonstrably weaker markets for major British supermarkets, reflecting changes to consumer behaviour, new competitor dynamics, increasing food eaten out of the home and channel shift.'

Furthermore, the broker says 'new space is not going to be the source of oxygen for the top-line that it once was for Sainsbury, and with easier inflation and perhaps some gross margin pressure, particularly if Tesco UK has to reset, then it maybe that operating channels receive greater attentions as sector costs increasingly appear to have to be cut.'

Cantor Fitzgerald also has a 'hold' recommendation on Sainsbury's. It takes the view that 'Sainsbury’s new CEO, Mike Coupe, needs to continue with their value simplicity pricing strategy and convince suppliers that lower starting prices and lower promotional investment (weeks on deal and depth of price cuts) is the way forward. We believe a value simplicity strategy could generate higher sales so long as Sainsbury’s maintains or grows like-for-like customer numbers.'

Issue Date: 11 Jun 2014