Week ahead: Sainsbury, Tesco

4th Jan 2013 08:52

Barring surprises markets´ focus next week is expected to veer towards central banks and the outlook for monetary policy in Europe. Neither the Bank of England (BoE) nor the European Central Bank (ECB) are expected to make a move this week. Until the budget negotiations Stateside are decisively concluded, however, economic uncertainty is expected to continue to cast a pall over economic agents´ decision making, albeit to a lesser extent than was feared before last week´s fiscal 'mini-pact,' so that the need for further easing cannot be dismissed. Neither can the risk of unwelcome surprises out of the Eurozone. Even so, in the last few days some economists have pushed their forecasts for rate increases by the BoE back by a year, to mid-2017, and there still seems to be some scope for further policy stimulus. This week´s economic announcements pertaining to industrial production, international trade and retail sales will all likely influence current market positioning in this regard. Investors are also watching to see whether the Monetary Policy Committee (MPC) will decide to replace those Gilts in its QE portfolio which are due to begin maturing in March. Similarly, the odds still seem to be best of an eventual rate cut by the ECB as the prolonged nature of the financial crisis continues to erode the performance of the core economies. That at least seems to be the thinking which now prevails amongst analysts. Meantime, and on the company front, much like most of its peers supermarket operator Sainsbury is facing difficult structural issues, partly as a result of its transition from larger stores towards the convenience store format and digital. So much so in fact that analysts at Investec: "remain negative on Sainsbury and believe that structural issues will weigh heavily on the company in 2013."The reasons why should be evident in next Thursday´s trading statement. While the company had forecast like-for-like (LFL) sales growth of between 1.4-1.5%, Investec expects reported LFL sales to have grown by just 0.5%. In fact, after stripping out inflation, maturing space, the internet, extensions and convenience the broker thinks the mature, core estate (the bulk of the business) must be down over 4% LFL. "(...) We expect the impact of compounded LFL volume declines for several years will lead to a re-basing of profits for large stores, with the internet and convenience not offering enough to compensate," the broker adds. Investec isn´t that much more upbeat about Tesco either, who will release its own trading update on the next day. Yes, "in sales terms, Tesco looks like it will be the relative winner in the UK," its analysts admit. Nonetheless, 1% or even 2% like-for-like (LFL) sales growth would still represent a significant volume decline for stores, after stripping out inflation (circa 3%), internet sales (circa 0.75% contribution to LFL) and maturing space (circa 0.75%)," they explain. "We do not expect profit forecasts to move next week, but investors should be very careful. Tesco still faces major structural issues in the UK and the international business needs a major strategic review," they finish by saying. 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