Farewell to a smooth operator...

This is one I have been in for while given the low rating, property backing and a decent yield which was growing modestly. In addition I saw the industry as a possible beneficiary of price inflation on the back of all the money printing going on in the last few years. I have also been a fan of Justin King who has done a great job of leading Sainsbury's in a difficult market and managed to keep it growing as Tesco's crown has slipped in recent years and the German discounters have gained market share.


Sainsbury's reported a first quarter trading update today for the 12 weeks to  7 June 2014. No doubt there will be many column inches written on this so I'll only comment in brief on the figures. Total retail sales were up 1% but down 0.3% including petrol, while like for like sales (LFL) were down by 1.1% and 2.4% on the same basis. They flagged that it was the slowest quarter in a decade for the industry on the back price cuts and consumer caution. They continue to emphasise their own label products and in particular their Taste the difference range as a point of difference and this range apparently sold well being up by 10%. They also seem to be relying on their brand match scheme to reassure their customers that their prices are competitive, but I note they say this was only true around 50% of the time. Anecdotally it still seems to me that their pricing is out of line with the competition so their margins look vulnerable to me.

As we all know the industry has been "Mullered" (seems an appropriate adjective given the World Cup starting this week, click the Mullered link above for an explanation & see video at the end) by rise of Aldi and Lidl and the pressure on consumer incomes generally. This as we all know has actually led to pressure on food retailers pricing and this was highlighted by a report on BRC figures which showed food sales actually fell last quarter for the first time since 2008 as a result. 

Thus is seems my investment case of them being beneficiaries of price inflation is no longer valid, in addition to which Justin King is due to leave just as their sales have started to turn down as the price competition hots up. Thus, although they are emphasising their growth in convenience, on line and non food they seem to bee running hard to stand still. Indeed analysts are now forecasting earnings and dividend being either flat or slightly down this year and next after big down grades to forecasts in the last three months or so. I'm mindful of what happened to Tesco after Terry Leahy left and I'm glad I sold them last year at 364p. Thus with a new CEO due, the yield in question but probably not growing at best - I sold my position in this one last week ahead of this announcement. 

I also note from the CFA short interest site which I have highlighted before, that Sainsbury's is one of the most heavily shorted stocks with 7.6% outstanding, most of which was opened in the last 3 months or so. This compares to 4.6% in Morrisons. I guess that could lead to a short squeeze if they reduce those on the back of these numbers, but suggests fund managers are also looking for this one to be reduced to clear. 

Finally, I'll leave you with a couple of videos - firstly a bit of music as a tribute to Justin King and the second one related to the "Mullered" phrase and the German footballer it relates to, although I note most of his goals seem to come from inside the six yard box or the penalty area so was he that great or just a goal hanger?

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