Tesco v Sainsbury

Earlier this week the big FTSE100 food retailers Tesco and Sainsbury squared off with updates to the city concerning their recent trading. Now that the dust has settled, it's pretty clear that Sainsbury came out the winner in the eyes of the city

Here are a few highlights from Sainsbury's 2nd quarter trading statement.

Total sales for second quarter up 4.3 per cent (4.4 per cent excluding fuel)

Like-for-like sales for second quarter up 1.9 per cent (1.9 per cent excluding fuel)

Total sales for the first half up 4.0 per cent (4.1 per cent excluding fuel) and like-for-like sales up 1.7 per cent (1.7 per cent excluding fuel)

Tesco on the other hand produced its half yearly report which while more or less meeting expectations didn't sparkle the share price, in fact the opposite. Fresh broker downgrades seem to have flown in, pushing the share price lower towards 300p.

Group sales up 1.4% to £36.0bn* (up 3.2% at constant rates); Group sales exc. petrol up 1.6% (up 3.7% at constant rates)

Statutory profit before tax down (11.6)% to £1.7bn; Underlying profit before tax down (8.5)% to £1.8bn

Group trading profit of £1.6bn, down (10.5)% - UK down (12.4)% to £1.1bn; International down (17.1)% to £0.4bn; Tesco Bank up 114% to £94m

Underlying diluted EPS reduction of (7.9)%

Interim dividend per share maintained at 4.63p

Group capital expenditure brought down from £2.1bn to £1.6bn; on track for a full year reduction to c.£3.2bn

Stats from digitallook.com.

Since their respective announcements, the Share price of each has gone in opposite directions, Sainsbury up, Tesco down.  The latter is now fast approaching the dark days of the share price low after the profit warning of early January this year.  Sainsbury however, seems to have found some love in the market, the charts below show their changing fortunes. Sentiment is with Sainsbury and against Tesco. 

The question is, can Sainsbury really be that much better and what would it take for Tesco to reverse this downward trend?  Sainsbury P/E is now over 12, Tesco under 9, which reflects the enthusiasm for the former and gloom around the latter, but it is difficult to see how such a gap long term can be justified. Tesco will either fail with its new strategy and the low P/E will be justified, or it will turnaround, in which case the share will be re-rated upwards. It's too cheap compared to Sainsbury to languish on a P/E of 8, unless the current profit decline is a permanent state of affairs.

However, anyone buying into Sainsbury right now need to realise that current momentum is likely to come to an end at some stage. Sainsbury is hardly a growth story, I'm not convinced there is enough to keep it going up as they share the same challenging market conditions in the UK as Tesco. On a personal level, I've always found Tesco to be a cheaper place to shop and most of what both sell are branded name products which are the same wherever you go. Tesco is also an increasingly international business, which can be a negative at times as the company found in Korea as store opening hours had to be cutback when the law changed costing around £100million, while Sainsbury depends solely on UK performance.

One bad quarter could see a Tesco type price drop for Sainsbury if sentiment changes towards it. Still, for now Sainsbury seems to be doing the right things, while Tesco struggles.

Other Tesco/Sainsbury posts can be found in the labels section in the right column.

Tesco Slides to Lowest in Three Months as Analysts Cut Estimates

Sainsbury

Tesco