J Sainsbury Plc Beats Tesco Plc Again

J Sainsbury (LSE: SBRY) (NASDAQOTH: JSAIY.US) is on a roll. Its total sales grew 4.9% in the last 12 months, according to latest figures from market researcher Kantar Worldpanel, giving it a 16.5% share of the £31.7bn grocery market, up from 16.4% one year ago. Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US) is toast by comparison. Its market share fell from 30.9% to 30.2% over 12 months. Sainsbury’s is whipping Tesco right now, so does that make it the cream supermarket to invest in?

Sainsbury’s started to look like a winner after it supported the Paralympics last year, with both tournament and sponsorship proving an unexpected success, and its growth has continued. It is breathing down the neck of second-placed Asda, whose market share fell from 17.5% to 17.1%, and way ahead of fourth-placed WM Morrison (down from 11.5% to 11.3%). That makes it the only one of the big four to gain market share over the past 12 months.

Tesco on the ropes

Sainsbury’s has also been the share price winner lately. Over 12 months, it has returned nearly 18%, double the 9% return from Tesco. Over two years, it is up 30%, while Tesco fell 1%. Sainsbury’s looks like the confident challenger, Tesco looks like the ageing champion wondering what happened to its knockout punch. 

Tesco has steadily abandoned the tactics that made it the UK retail heavyweight: selling off sites, scaling back global expansion plans and ceding territory to Amazon‘s online armies. But it has a plan, and it isn’t a bad one. Management is doing all it can to make its existing superstores attractive “destinations”, luring customers with faux-artisan coffee chain Harris + Hoole and family food franchise Giraffe, and bolting on everything from bars to children’s play zones.

Highs and lows

Tesco is excited by its new strategy. Many shoppers go to Tesco because they see it’s cheap, but it isn’t always cheerful. This has left it squeezed between high-end Waitrose, which saw a 9.1% rise in sales, and low-end discounters Aldi (sales up 31.9%) and Lidl (up 14.9%). Despite its strong recent showing, things haven’t all gone Sainsbury’s way. Last month, it was reported that its food prices were rising at more than twice the rate of Tesco’s, up 5.2% in the year, against 2.4%. That suggested a good chunk of its growth was down to higher prices, rather than higher volumes. 

Sainsbury’s claims to be all about values, while accusing Tesco of caring only about price. But which stock offers better value to investors? 

Sainsbury’s trades at 12.6 times earnings, making it more pricey than Tesco’s 10.3 times earnings. Its yield is slightly higher, however, at 4.32% against 3.99%. Sainsbury’s is on forecast earnings per share (EPS) of 6% to March 2014 and another 6% in the subsequent 12 months, lifting the yield to a forecast 4.7%. Tesco’s EPS growth looks flat to February 2014, before picking up to 5% in the 12 months that follow, raising the yield to 4.3%. 

Battle Royale

I suspect Sainsbury’s will continue to thrash Tesco for a bit longer, but don’t expect that to last forever. Nothing does. Tesco’s fightback has begun, and I expect it to gather force. The bigger question is whether both can survive a far greater challenge, and stay on their feet in the face of their many online challengers.

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> Both Harvey and The Motley Fool own shares in Tesco.