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Sainsbury’s vs Tesco: what do I think is the better buy?

Stepan Lavrouk
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It’s no news to anyone that the grocery sector is in the middle of a rough patch. But which supermarkets are doing comparatively better? Today let’s examine two rivals: J Sainsbury (LSE: SBRY) and Tesco (LSE: TSCO). 

Sainsbury’s

The last 12 months has been an extremely rough ride for investors in Sainsbury’s. Shares in the retailer have fallen from 326p in July 2018 to 200p in late July 2019, a decline of almost 39%. The stock has still to recover from the failed merger with supermarket chain Asda, a plan that management had staked its hopes on. Currently, shares of Sainsbury’s trade at a price-earnings ratio of 9 and with a dividend yield of 5.5%, which is a good illustration of the uncertainty surrounding the company. 

In its most recent trading update in early July, Sainsbury’s management reported a third consecutive quarter of falling underlying sales, with lower figures in groceries, clothing and general merchandise. Price cuts on over 1,000 items seem to have done little to stem the tide, but have put increased pressure on Sainsbury’s margins, which are already some of the thinnest in the business. 

The biggest problem for the firm from a strategic point of view is an inability to determine what kind of retailer it wants to be. In the era of the dying high street, supermarkets have had to reinvent themselves. Waitrose and Marks & Spencer (for foods, at least) focus on providing better service and higher-end products, whereas Tesco and German discounters Lidl and Aldi compete on the basis of price. Sainsbury’s is currently somewhere in between these two models, and consequently is being squeezed from both sides. 

Overall, I don’t really see a way forward for Sainsbury’s that doesn’t involve a drastic reorganisation of the core business. For this reason, I would stay away from the stock.

Tesco

By contrast, the Tesco story has been one of recovery. Although the share price is down 12% year-on-year, from 256p to 225p, investors who got into the stock in late 2018 have been richly rewarded. The stock has been consistently bid up as the market has responded well to CEO Dave Lewis’s reforms. That means shares of Tesco are currently trading at a P/E ratio of 16.6 and have a dividend yield of 2.5%. 

Its recent financials have also been heartening, showing growth of 0.8% in first-quarter sales, again in contrast to Sainsbury’s. While the numbers aren’t stellar, they should be viewed in the context of a tough retail environment. The best growth numbers were seen at cash-and-carry subsidiary Booker, which was acquired in 2018. There, like-for-like sales grew 3.1% compared with the previous year’s period. 

Tesco remains the undisputed leader in its industry, with a market share of 27.3%, well ahead of Sainsbury’s and Asda, which are tied in second place with 15.2%. Moreover, I believe that the pressure being exerted on all supermarkets will ultimately result in Tesco becoming an even more prominent player. For these reasons I am positive on the stock.

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Stepan Lavrouk owns no shares mentioned. The Motley Fool UK has recommended Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2019