Sainsbury's toughs out trading challenges

By This Is Money
Updated: 06:14 EDT, 15 June 2011

Sainsbury's boosted quarterly sales as the double bank holiday and 'glorious' April weather overcame a challenging consumer climate.

Wedding celebration: Sainsbury's sold nearly 300 miles of bunting and the most champagne ever outside a Christmas period

The supermarket giant reported 1.9% sales growth excluding fuel and the impact of new stores but including VAT in the 12 weeks to June 11.

Tesco yesterday reported an equivalent figure of 1% growth.

Sainsbury's said its customers had celebrated Easter and the Royal Wedding and the warm weather despite the tough economic conditions.

But it warned: 'The market environment remains very competitive, reflecting the challenging economic backdrop. We expect this to be the case throughout the year.'

Shares in the UK's third-largest supermarket rose 0.5p to 327.3p.

The company said general merchandise and clothing grew faster than food - an area in which Tesco is struggling - as it had its best quarter ever for childrenswear.

The royal wedding saw the supermarket sell nearly 300 miles of bunting, 159,000 flags and 49,000 mugs, while it also sold the most champagne ever recorded outside Christmas.

Sainsbury's reiterated yesterday's warning from Tesco that customers are spending more money at the petrol pumps and less on their shopping.

The supermarket said its cheapest Basics brand was the fastest-growing at the store, signalling a move by customers to keep their costs down.

However, Sainsbury's did see growth in its upmarket Taste The Difference range, which was relaunched last September.

The company's drive to expand its convenience store business continued as it delivered 20% growth in the period, while online groceries also grew by 20%.

Sainsbury's opened two new supermarkets in the quarter and 13 convenience stores, as well as replacing one supermarket and extending three others.

View from the City

'Sainsbury is doing something right which Tesco is doing wrong,' said Tom Gadsby of asset manager Matrix. 'A lower non-food exposure helps, but that is only a part of the out-performance.'

'The value range is going well and has a 22% market share (versus 16% overall), and the premium Taste the Difference range is also going very well, echoing Tesco's 10% Finest like-for-like growth yesterday. There is a clearly a bit of a flight to quality, possibly as a replacement for eating out.'

He retained a buy rating on Sainsbury's with a 377p target price.

Investment bank Espirito Santo said the underlying sales picture remained subdued.

'Sainsbury, Morrison and Tesco are all performing as a pack, which has been highlighted by Kantar data over the last few months. As such, Sainsbury is unlikely to regain its momentum premium in the near term.

'We continue to prefer Morrison for superior earnings growth and a more attractive valuation, and Tesco for the international growth opportunity.'

Analysts at Royal Bank of Scotland said Sainsbury's first quarter sales represented a solid start with contributions coming from all parts of its business model.

'Of course, the Easter period would have benefited sales and looking ahead while we expect further solid progress from Sainbury's, the backdrop will remain challenging,' they added.