Supermarkets hammered again on Sainsbury results

Tesco is down 3.5% to 179p, Morrison is down 5% to 159p and Sainsbury’s is down 5% to 238p after the latter reported sales which were less bad than expected but called into question its dividend policy and caused profit estimates to be cut by nearly a fifth to £650 million. Kantar Retail data had indicated that Sainsbury’s sales had dropped as much as 4% in recent weeks so investors were primed for poor news. The UK supermarket sector bloodbath continues!

The UK’s third largest food retailer, reported a 2.8% drop in like-for-like sales compared with initial forecasts of flat sales and warned of weak revenues for the remainder of this year and next with Chief Executive, Mike Coupe, blaming a highly competitive environment caused a variety of factors but denied that the discounters such as Aldi were directly to blame. Sales for the first half of the year dropped 2.1% against a back drop of a food market close to deflation with the latest data indicating that the sector was flat at best with shoppers seemingly shunning larger stores in favour of more frequent and smaller top up shops and bumper harvests driving down the price of staples such as wheat.

Coupe said that Sainsbury will conduct a strategic review and update at their interims on November 12th with many expecting a significant cut in the dividend given the rough profits picture as “The reality is the market has changed more rapidly in the last three to six months than I have seen in my 30 years in the industry,”.The shares are already down 35% this year before today’s falls and it seems that the exit of Justin King, Coupe’s predecessor, like Sir Terry Leahy at Tesco, was well timed. The supermarkets are blaming decreasing customer loyalty, more focus on price and a tendency to eat out more.

Sainsbury is at least confidence about its accounting practices after Tesco’s revelation of a £250 million black hole in its accounts with the Chief Executive saying he was 100% confident in the accounts.

UK supermarkets must be a value buy at some point, but spotting the bottom on this “falling knife” is a tough act especially when bad news seems to be endless and with the FCA now investigating Tesco as well as auditors who knows what damage the country’s biggest supermarket could inflict on the sector. Plenty of trouble in store that’s for sure!

Contrarian Investor UK

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