FOOD RETAIL : Nielsen to 14th June: market accelerates; SBRY doing better than TSCO

Research evidence excerpt

FOOD RETAIL : Nielsen to 14th June: market accelerates; SBRY doing better than TSCO

Refinitiv

Investment case, valuation and risks

Sainsbury (Outperform, Target Price 365p)

Investment case

Sainsbury's is showing its strongest period of market share gains in more than 10 years

as years of price investment and range focus are delivering against a struggling

competitor set. Further market share gains can come from opening more grocery space

than key competitors, with cost savings driving margin expansion and buybacks seeing

EPS growth in the DD% across our forecast period. We see years of investment in

data/loyalty compounding these advantages, particularly against peers who have

pulled back on loyalty programmes recently.

Valuation methodology

We value Sainsbury using a DCF methodology. We use a WACC of 9.7% and a terminal

growth rate of 1%.

Risks

To the upside:

If Sainsbury demonstrates margin resilience and stronger than expected trading, then

the shares' multiple could expand. We think margin expansion is likely to come from

improving customer engagement through data, the group's cost saving plans and less

wage pressure to come, but it is possible this is even more material than we think.

To the downside:

The main negative risk to our rating and TP is if Sainsbury's trading and margins face

greater pressure than modelled. We think this is most likely to come from external forces

such as a major change at a competitor, but the group also has higher discretionary

spend exposure than peers and so could be exposed to continued pressure on

consumption. Enduring Argos under-performance is another risk.

Tesco (Outperform, Target Price 525p)

We see Tesco as one of the best positioned retailers in our coverage, with its market