What Do J Sainsbury plc’s Results Say About Tesco PLC?

The slide of supermarket giant Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US) has coincided with the rise of deadly rival J Sainsbury (LSE: SBRY) (NASDAQOTH: JSAIY.US). While Tesco has lost market share, issued profit warnings and floundered overseas, Sainsbury’s quietly posted a steady rise in share, sales and profits. Their contrasting fortunes are reflected in markedly different share-price performance. Tesco is down 16% over the past two years, Sainsbury’s is up 24%. Tesco’s numbers for the last five years are a sea of red arrows, and I’ve been dallying with the idea of selling my stake for months. Now the crucial Christmas trading results are coming in, it could be time to make up my mind.

Supermarkets generally have been a dismal investment for some years. Even Sainsbury’s has only delivered growth of 12% over the past five years. Shoppers are short of cash, as wages limp behind inflation, while cut-price interlopers Aldi and Lidl are nibbling away at their customer base. On Wednesday, Sainsbury’s chief executive Justin King warned the festive quarter was “very tough”, but still managed to deliver a 0.2% rise in like-for-like sales. The market took this in good cheer, not least because it extended the supermarket’s run of sales growth to 36 consecutive quarters. But that looked feeble against sales growth of 1.4% in the six months to the end of September. King suggested that cash-strapped shoppers left their Christmas splurge to the very last minute this year, and will remain cautious in 2014, as they look to rebalance their household finances. This year looks like another tough one for supermarket shareholders.

Say no to Tesco

High-end supermarket Waitrose had plenty of festive fun, however, with a 3.1% rise in like-for-like sales in the five weeks to Christmas Eve. It also noted a last-minute shopping splurge, with 23 December its busiest ever trading day. Aldi and Lidl were in a winter wonderland, with combined sales growth of around 20%. Tesco publishes its results tomorrow, but the market is downbeat, having pencilled in a 2% drop in like-for-like sales over the Christmas period. Let’s hope it can beat expectations.

Tesco is in the middle of a £1 billion turnaround campaign, Building a Better Tesco, so we shouldn’t judge it entirely on its festive performance. But if Sainsbury’s found Christmas hard work, the signs aren’t good for Tesco. No wonder you can buy it at just 9.2 times earnings (against 12 times for Sainsbury’s). Tesco now yields a juicy 4.4%, which may still tempt income seekers. Other investors will simply hold it out of habit. But unless it can show signs of building a better business over the next few months, I won’t be holding this stock by next Christmas. We will find out more on Thursday.

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