Sainsbury Confounds Skeptics as Tesco Revival Effort Falls Short

  • Shares surge after grocer says profit will beat estimates
  • Attention now turns to Tesco's first-half results next week

J Sainsbury Plc’s boost to its profit forecast showed that the U.K. grocer is resisting the revival efforts of market leader Tesco Plc.

Tesco has cut prices on at least 700 product lines this year in an effort to win back customers who have been flocking to discounters Aldi and Lidl, but could have gone further, according to analysts such as Clive Black at Shore Capital.

Tesco hasn’t been “anywhere near as active as we felt it may have been in the development and advancement of its offer," Black said in a note.

That’s been a blessing for the likes of Sainsbury, which said Wednesday that full-year pretax profit will surpass analysts’ estimates of 548 million pounds ($831 million). The news provided a rare bright spot for the U.K. grocery industry, where profit warnings and dividend cuts have become the norm amid an industry price war. Sainsbury shares rose as much as 15 percent, the most in almost six years. Tesco gained as much as 6.3 percent.

Sainsbury’s sales aren’t being hurt by the recovery efforts of its main competitors, which “we believed would put its margins and the balance sheet under pressure," Stifel Nicolas analyst James Collins said in a note. Collins, who placed his sell rating under review, said data supplied by Kantar Worldpanel suggests Sainsbury gained customers from Tesco over the summer.

Before today, Sainsbury shares had fallen 7.1 percent this year, compared with Tesco’s 9.4 percent decline. More than a third of analysts covering Sainsbury have a sell recommendation, compared with a quarter for Tesco. That’s despite the company reporting stronger annual same-store sales growth than Tesco and smaller competitor Wm Morrison Supermarkets Plc for five straight years.

Sainsbury’s high-end Taste The Difference foods and Tu clothing range were among the grocer’s best performers in the second quarter. Taste The Difference sales rose 4 percent, while Tu’s clothing website “significantly exceeded expectations” in the six weeks since it was introduced nationally, Sainsbury said. Profit was helped by reduced wastage as a result of fewer price promotions, Chief Executive Officer Mike Coupe said on a conference call.

Investor attention now turns to Tesco, which is due to report first-half earnings Oct. 7.

“Sainsbury’s is a more stable business than Tesco,” said Mike Dennis, an analyst at Cantor Fitzgerald in London. “It’s going to be harder for Tesco to rebuild profit.”