Is J Sainsbury plc Set To Do a Tesco PLC?

Sectoral Anxiety

These are edgy times for investors in the big supermarkets. Last week, Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US) posted its worst quarterly figures for 40 years. On Wednesday, it’s the turn of J Sainsbury (LSE: SBRY) (NASDAQOTH: JSAIY.US) to step into the limelight, with its Q1 trading update. Can it defy the sectoral downturn?

Last week, I predicted Tesco faced its very own Black Wednesday, and the reality was grim. A 3.7% drop in like-for-like sales in the three months to 25 May ended with calls for chief executive Philip Clarke’s resignation. Clarke depressed markets further by saying that sales were unlikely to improve in the coming quarters. 

King Abdicates

Sainsbury’s has boldly defied the decline of the Big Four, which has also hit Asda and Morrisons, to famously deliver 36 consecutive quarters of growth. Its winning streak came to an end in the three months to 15 March, however, when total sales (excluding fuel) fell 3.1%, the first drop in nine years. This sank chief executive Justin King’s plans to quit on a high.

There will be no fond farewells if this week’s results are as disappointing as predicted, with suggestions that sales have fallen up to 1.5% in the past 12 weeks. One year ago, Sainsbury’s was still able to squeeze out some growth, with a 0.8% rise in sales. That may look like a narrow squeak, but given the current rough trading environment, it was actually quite a result.

Analysts at Barclays, who protect a 1.1% fall, have warned it would be wrong to see this as an underlying improvement on the final quarter of last year, when sales fell 3.1%. The late Easter hit Q4 results, but will egg up this week’s numbers. 

German Mustard

Once again, we know the culprits. It wasn’t Colonel Mustard in the library with the candlestick, but mustard German supermarkets Aldi and Lidl in the retail park with the low prices. They did for Tesco as well. And Morrisons. Only Waitrose has so far escaped a bludgeoning.

Some thought Sainsbury’s was immune, because its profile is more upmarket than its big rivals. If this week’s rumours are correct, it is getting sucked into the mire as well. That might also test management’s resolve to stay aloof from the recent price war.

I would still pick Sainsbury’s over lost-its-way Tesco, and results would have to be astonishingly bad on Wednesday to change my verdict. I am keen to see what management says about the UK consumer (I suspect the word “challenging” might be used) and whether it is arming itself for a price war. Sainsbury’s won’t do a Tesco, but the comparisons are a little too close for comfort.

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Harvey doesn't hold shares in any company mentioned in this article. The Motley Fool owns shares in Tesco and has recommended shares in Morrisons.