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Is J Sainsbury plc A Better Buy Than Tesco PLC Despite Falling Q1 Sales?

Photo: Mickey McCarthy. Public Domain.

This morning, we had a first-quarter release from J Sainsbury (LSE: SBRY) ahead of a similar update due from Tesco (LSE: TSCO) on 26 June. Does it give us any idea which one would be better to buy?

Sainsbury’s shares responded with a small gain, up 4p (1.7%) to 253p in early trading, so were the numbers good just three months after the UK’s third-largest supermarket chain posted its first full-year loss in a decade? No, not really. In fact, like-for-like sales fell for the sixth successive quarter, by 2.1% excluding fuel (and by 3.7% including fuel).

Competition is hurting

Chief executive Mike Coupe put the problems down to “strong levels of food deflation and a highly competitive pricing backdrop“, which is something we already knew really — Sainsbury’s is not managing to match the competition from Lidl and Aldi.

Sainsbury’s strategy is still “to reinforce our quality credentials” in the words of Mr Coupe, and appealing to a slightly more up-market clientele has always been the aim. But that approach is suffering, as the lower-priced retailers are muscling in on that segment, too — Lidl’s latest ads are clearly aimed at the Sainsbury’s crowd.

Sales and profits are surely going to fall further until the adjustment to today’s more competitive environment is complete, and Sainsbury’s is going to have to get used to permanently lower profit margins. That transformation is not going to be complete this year, at least not according to forecasts, and it’s not likely to be next year either — we have a further 20% fall in EPS predicted by March 2016, with a 2% drop pencilled in for the year after.

Tesco better now?

But what’s Tesco’s first quarter this year going to be like? With the stock’s recent mini-recovery going off the boil, it doesn’t look like the markets are expecting anything great just yet — the falling price trend recovered by 50% from the middle of December to its April peak of 251p, but since then it’s turned down nearly 20% to today’ 202p.

It was really quite hard to tell how the recovery plan is coming along from 2014’s full-year results. Although Tesco reported its first rise in UK like-for-like sales volumes in four years, profit margins are still being pared and overseas operations are struggling. And like Sainsbury’s, it’s still finding it hard to compete.

There’s talk of Tesco’s Korean subsidiary, which is facing very tough trading conditions, being sold off — so we might hear something of that come the 26th.

Sainsbury is cheaper

Even if we get positive news, Tesco shares are still on a forward P/E of more than 22 based on February 2016 full-year forecasts, dropping only as far as 17 on 2017 guesswork. And that to me is too optimistic a rating for a company that has lost its way in its market and still doesn’t appear to have found the answer.

Sainsbury’s is looking better value than Tesco to me on a forward P/E of a bit under 12, but I wouldn’t buy in based on today’s Q1 figures — we’re still looking at a sick sector.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK owns shares of Tesco. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.