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Back in the saddle

19 March 2013 By George Hay

Sainsbury is deservedly reaping the financial rewards of staying horse-free. Unlike peers such as Tesco and Asda, the UK supermarket didn’t find equine DNA in its food products in the first few months of 2013. That helped it achieve a surprisingly strong 3.6 percent jump in like-for-like sales excluding fuel. Sainsbury’s brand resilience offers fresh justification for its premium rating.

True, the outperformance was about more than just accurate food labeling. Even before the horsemeat scandal became a cause célèbre in the middle of the group’s fiscal fourth quarter, sales were already strong, according to a person familiar with the situation.

But it is clear that Sainsbury’s basic strategy – pushing own-brand products and extensive marketing to reassure customers that its prices are no higher than peers – is back on track. It came unstuck around Christmas when rivals cut prices, pushing like-for-like sales growth down to 0.9 percent. That now looks like just a wobble.

The investment story could yet be undermined by the late discovery of rogue meat in a frozen lasagne. Assuming that risk is receding, Sainsbury has bragging rights from its reliance on domestically sourced beef and chicken and rigorous controls on frozen food sourced from abroad. While hard to measure, that’s good for consumer trust in the name.

Sainsbury trades on 11.9 times its expected year-end earnings, ahead of Tesco’s 11.4 times by a nose, according to Thomson Reuters Eikon estimates. That is justified by slightly stronger earnings growth forecasts.

Justin King, the chief executive, has the bit in his teeth. And yet he is slowing capital expenditure to 1 billion pounds this year, against initial plans to shell out 1.1 to 1.2 billion pounds on new stores and expansions. Although peers are trying similar cuts, it’s a gamble that rising inflation – evident in figures released on Tuesday – squeezes UK consumers’ incomes. If he has made the right call, and Sainsbury stays scandal-free, the premium rating should be comfortably sustained.


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