Sainsbury's sales unravel over festive quarter

Total sales fell 0.4% in the third quarter ending 5 January, with like-for-like sales excluding fuel down 1.1%. City analysts had forecast a 0.3% dip in LFL sales after the 0.2% gain in the first quarter and 1.0% in the second.

Grocery sales grew 0.4% but general merchandise sales from the Argos arm dropped 2.3%, both falling well short of consensus estimates, while a 0.2% decline in clothing sales was better than expected.

While Argos outperformed a weak general merchandise market in the quarter, with strong sales growth in the Christmas weeks and 23 Argos stores opened in Sainsbury's supermarkets, margins remained "under pressure".

Chief executive Mike Coupe, who as well as trying to keep growth on track has also been jointly wrestling to get a merger with rival Asda over the line, felt grocery sales were "solid" across the quarter and argued that the price position versus competitors improved.

General merchandise sales grew strongly over the key Christmas weeks and outperformed the market over the quarter. Sales declined in the quarter due to cautious customer spending and our decision to reduce promotional activity across Black Friday," he said. "Clothing performed well, with strong full price sales growth in a tough market."

However, it was the first quarterly decline for GM sales after two positive quarter and the weakest grocery performance in over two years.

The Competition & Markets Authority last month said it would notify of its provisional findings on the Asda deal and consider possible remedies in late January or early February, with response hearings, if required, to be held in mid-February ahead of a regulatory decision expected in April.

Coupe and co expect savings and synergies from the Asda deal to boost profits by at least £500m.

MARKET REACTION & ANALYSIS

Sainsbury's shares fell less than 1% to 265.8p in early trading on Wednesday, having already slumped more than 12% since the end of November.

It was a "truly woeful set of numbers" said Neil Wilson, chief market analyst at Markets.com, suggesting management "is taking its eye off the basics" as it wrestles to get the Asda merger over the line.

"Customers are cautious but Sainsbo's should be doing better. At a time of gently rising inflation and improving real wages Sainsbury’s ought to be enjoying growth in group sales. There have been for some time question marks over the store offering and presentation, which is starting to look like a persistent problem."

He added: "Overall, clearly the discounters are having a big impact, but with the exception of a mega tie-up with Asda it’s hard to see what Sainsbury’s is doing to combat them effectively," Wilson said, adding that He felt the CMA was likely to reject the merger.

Clive Black at broker Shore Capital said he was likely to trim his full year forecasts, noting margin pressure in GM and negative grocery volumes offset by the reiteration of c£200m of cost savings.

He also suggested the soft operating performance was creating "considerable" downside risk to the shares from a merger failure.

"Whilst the stock has fallen from its 305-325p trading range for much of CY2018, we believe that there remains considerable further potential downside pressure (c20-30%) if the CMA goes against the proposed merger parties; reiterating the points above that this appears a merger of weakness with the Sainsbury investment thesis hanging on the CMA’s decision."