HSBC reiterates 'reduce' rating on Sainsbury after trading update

The supermarket group, which is now also a major general merchandise retailer after completing the acquisition of Home Retail Group's Argos on 2 September, revealed on Wednesday that total retail sales fell 0.4% in the 16 weeks to 24 September, with like-for-like retail sales including VAT but excluding fuel down 1.1%.

Sainsbury's blamed industry-wide falling food prices for the decline in sales.

“ADI (Adverse Differential Inflation: cost inflation is higher than selling inflation) is a problem for any company, but is a particular problem for a company with declining sales and facing intensifying price competition,” HSBC said.

“The industry is in the midst of the deepest and longest period of ADI in recent history and there is no sign this will end soon. Management says it is pleased with progress against its business plan, but that plan includes expected on-going decline in the core estate and with high operational gearing, this is worrying to us.”

HSBC added that it believes Sainsbury’s “lacks the scale” of Tesco and has a weaker balance sheet than Morrisons.

The bank also remains “unconvinced by the Argos deal and view it as a major distraction and management drain at a crucial time”.

Sainsbury’s plans to open another 15 Argos in its stores by Christmas, taking the total to 30, and to have 200 collection centres by the year end.

“We would also question would Sainsbury have opted to buy this company if they had known we would be heading for Brexit and the exchange rate would depreciate?" HSBC said.

“There may be some protection from short-term hedging but the long-term problem of rising costs is not going to go away – especially if consumer spending slows.”

HSBC expects Tesco will become more aggressive in the fourth quarter and the current equilibrium will be upset.

With a weak balance sheet, high operational gearing and the distraction of integrating Argos, Sainsbury looks vulnerable to intensifying competition, the bank said.

Shares rose 0.41% to 242p at 0943 BST on Thursday, reversing Wednesday’s decline.