20 May 2019

Sainsbury’s Stretched but not broken

Despite concerns on strategic direction after the thwarted Asda merger, we continue to believe that Sainsbury’s has a solid, growing, core business.

Of the strategic choices open to management, we believe that the current focus on organic growth will prove the best option. Sainsbury’s is having to rethink its mid-term strategy, leaving a short-term vacuum until the Capital Markets day on 25 September.


There are a number of directions that that strategy might take including a move into other geographies, expanding across the supply chain and/or focussing on organic expansion. We believe that for now management is taking the correct option, sticking to optimising the existing business, from value of products through improving the customer experience to improving internal efficiencies.


Total indebtedness has reduced financial flexibility in the past but we believe that reduction of net debt (down £684m in the four years to year-end FY19A to £1.64bn including perps) and guidance of a further £600m reduction in the next three years, illustrates management’s fiscal prudence. Note that this reduction is on top of a guided £550m retail capex spend (we have £606m pencilled in for the Group) on store refurbishments.


UK this week

Last week brought much hot air on Brexit and in UK political spheres but very little to shift the current Brexit stasis. Indeed, the Prime Minister continues to duck and dive efforts to accelerate her departure from office, having not yet set out a date to stand aside. There was some Brexit chatter in the English press over the weekend, which we go into more detail in our ‘Thought of the day’ piece below but UK political focus this week will definitely be on the European Parliamentary elections, which take place on Thursday in the UK.


There is little doubt that the Conservative party is set to suffer a heavy blow. Bizarrely though the PM, already clear that her time in office is finite, might not view this as totally unhelpful, perhaps considering that deflated Conservative MPs, desperate to avoid a General Election at this time, finally fall into line and back her Withdrawal Agreement (WA). That would then open the door to a new Prime Minister coming in and carrying forward discussions over the UK’s future relationship. The PM appears set on waiting for the WA to pass parliament before detailing her departure date.


US this week

Risk appetite had been struck from the menu after what appeared to be an all-out collapse in US-China trade talks last week. The US had raised tariffs on $200bn of Chinese imports, it had set off a process to consider a tariff increase on a further $300bn, and in the middle China had outlined its retaliatory actions. There was confirmation of the delay to auto tariffs over the weekend, this may come as a double edged sword , accompanied with warnings of new tariffs being applied by a set date, if a deal is not reached with the EU (and others).


Secondly, investors will be keen to hear whether any new US-China trade talks are to be scheduled, ahead of the G20 at the end of June. Finally, President Trump’s travels to Japan to meet with Shinzo Abe amidst hopes the US-Japanese trade talks could be set to move in a more favourable direction.


Data this week

As if there aren’t enough political events to keep track of next week (and we have not even discussed developments on the Iranian front or the wider repercussions of the European Parliamentary elections on the continent), there are many economic events and data releases due out too. In the US, the minutes to the April/May Federal Open Market Committee meeting will be published mid-week, though investors will need to ‘tone adjust’ these for trade news since the meeting.


ECB President Mario Draghi is also set to speak Wednesday morning, with policy watchers desperate for any clues ahead of the important June ECB meeting. In the data calendar, we have inflation figures in the UK, preliminary PMIs for the Euro area and the US for May and much more.


Thought of the day: Brexit Developments

Brexit developments over the weekend have seen Prime Minister May promise a ‘bold new’ Brexit offer, in one final push to break the deadlock over Brexit. The government might even bring the Withdrawal Agreement Bill (WAB) to parliament next week, with talk of a vote on either the 4th or 5th June. The details of this offer are reportedly set to be agreed at tomorrow’s cabinet meeting, but it is reportedly set to include protection of workers’ rights and environmental standards, the aim of these being to try and persuade some Labour MPs to support PM May’s Brexit plan. However the arithmetic still remains challenging, with several MPs having already expressed their scepticism over the plans.


Sterling has continued to suffer from Brexit uncertainty with EUR/GBP having moved up to a high of just below .8780 on Friday afternoon. On one final point, note that European Parliamentary elections are set to be held in the UK this week (23 May), with polls continuing to point to a poor showing for the Tories, with the latest poll (Opinion), showing the Tories coming fourth, with just 12%, whilst the Brexit party was polling at 34%.


Economic Releases

17.30 UK BoE Deputy Governor Ben Broadbent Speaks