September 30, 2015 / 6:20 AM / 2 years ago

Sainsbury's profit upgrade cheers British supermarkets

A Sainsbury's supermarket sign is seen in London January 6, 2015. REUTERS/Stefan Wermuth

LONDON (Reuters) - British supermarket Sainsbury’s raised its profit forecast and posted better-than-expected quarterly sales on Wednesday, sending its shares soaring on hopes the worst may be over for the battered sector.

Sainsbury‘s, which has shown greater resilience to competition from discounters Aldi and Lidl than its “big four” British rivals, said underlying sales fell in the second quarter to the end of September, but not by as much as feared.

The supermarket said that meant it was on course to beat the average analyst forecast of 548 million pounds ($831 million) for 2015-16 underlying pretax profit, sending its shares up 14.7 percent, the biggest intraday rise since February 2007.

After two years of sector downgrades, the upbeat readout also boosted the shares of rivals Tesco and Morrisons by up to 5.4 percent and 6.8 percent respectively. Asda, the other big four supermarket, is owned by Wal-Mart.

One of Sainsbury’s major institutional shareholders welcomed the “very solid” update. “No fireworks, just running a tight ship in a tough, but stabilizing, environment,” he said.

Sainsbury’s sales at stores open more than a year fell 1.1 percent, excluding fuel, in the 16 weeks to Sept. 26. That was a seventh quarterly decline in a row thanks to fierce competition with rivals that has contributed to lower prices.

Analysts had on average expected a decline of 1.3 percent after a 2.1 percent fall in the first quarter.

Sainsbury’s Chief Executive Mike Coupe highlighted volume growth of just over 1 percent and an increase in transactions.

“The two things are pretty encouraging and a slight improvement on the previous quarter ... The trend’s in the right direction,” he told reporters.

He also noted the decline in average basket spend in supermarkets had continued to stabilize.

“But you can’t get away from the fact that it continues to be a very challenging trading environment and the competitive dynamics haven’t gone away,” he said.

DEFLATION PERSISTS

Coupe does not expect deflation, which he said was 1.5 to 2 percent in the quarter, to abate until the early part of 2016 at the earliest.

Sainsbury’s said it now expects 2015-16 profit to be “moderately ahead” of analyst forecasts, although it will still be down from the 681 million pounds made in 2014-15.

Bernstein analyst Bruno Monteyne said this was a change of tone from Sainsbury‘s.

“It has tried to take a cautious message up to now, that it will go ‘toe to toe’ with whatever price investment anyone else makes. That it is talking up guidance is now showing they are more confident in their strategic position,” he said.

Coupe’s strategy, outlined in November, sought to stem the flow of shoppers to discounters with price cuts and improvements to product quality and availability and customer service, financed by cost savings and dividend reductions.

Critics argue the quarterly improvement does not detract from the big strategic issues Sainsbury’s faces: deflation, intensifying competition, wages and other cost increases.

And some argue the shadow of Tesco looms large.

“We do still harbor a particular concern that should (Tesco) ‘get its act together’, then Sainsbury may be particularly vulnerable to attrition,” said Shore Capital analyst Clive Black.

Earlier this month, Morrisons posted a 2.4 percent fall in second quarter like-for-like sales. In August Asda reported a 4.7 percent slump in underlying sales for its first quarter, describing the fall as its “nadir”. Tesco will give an update on its second quarter on Oct. 7.

Additional reporting by Tricia Wright; editing by Kate Holton and David Clarke

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