Sainsbury's: risks outweigh positives
Published:  12 May, 2011

Leading city experts have branded Sainsbury’s position as ‘vulnerable’ despite a good performance this year, with risks to the supermarket outweighing the positives.

David McCarthy and Andrew Porteous of Evolution Securities said that a weak free cash flow and relatively high gearing left Sainsbury’s vulnerable to industry dynamics.

They attributed the slowing in like for like (LFL) growth in Q4 to an easing of promotions, but that these had been increased sharply over the last few months. However the loss of momentum during the fourth quarter remained “a concern” and could impact the share price if it proved to be more than a blip.

They said that aggressive capital spending over the last two years had impaired the supermarket’s ability to generate cash and, with further expansion stepped up, a funding gap may open.

They said: “Sainsbury’s is among the main protagonists if the ongoing Capital War. In the current climate, we are concerned on the returns for new space. With industry opening programs to remain elevated for at least the next 3 years we believe the problems currently being seen (eg subdued LFLs) will persist for some time.”

They concluded that although Sainsbury’s had done well strategically, winning share from Tesco’s and proving it was in tune with the customer, the margin expansion remained muted and it did not warrant its current premium rating. They rated Sainsbury’s a Reduce with a 310p price target.

>Pre-tax profits surge 12.5% at Sainsbury’s

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