Sainsbury’s needs a Plan B, bad news from the banks, and Taylor Wimpey highlights housebuilder margin conundrum

Thursday, April 25, 2019 - 09:59

“The FTSE 100 was off to a ropey start on Thursday as it continued its retreat from year-to-date highs seen earlier in the week.

“The index appeared to be taking its cue from a subdued showing overnight on Wall Street and a mixed session in Asia with the mining sector a material contributor to the weak showing,” says AJ Bell Investment Director Russ Mould.

Sainsbury's

“The Competition and Markets Authority recently made it fairly clear that Sainsbury’s had little chance of merging with Asda. And now we have confirmation the deal is off.

“The competition watchdog has been getting tougher with companies in the past year to ensure consumers and businesses don’t lose out from mergers and acquisitions.

“There were lingering doubts that consumers would benefit from the supermarkets coming together and suppliers were certainly shivering in their boots about how tough a combined Sainsbury’s-Asda entity could be.

“All attention now turns to Sainsbury’s and how it will no longer be able to lean on Asda to drive earnings.

“Its sales have been weak and the customer experience in its stores has been getting worse.

“Management may argue they were distracted by the deal talks but that would be a poor excuse. They have taken their eye off the ball and lost focus on how the day-to-day business is run.

“Fundamentally the business has lost its way and doesn’t know how to make its proposition stand out in a crowded market. Service standards have slipped and customers have voted with their feet by shopping elsewhere.

“Sainsbury’s chief executive Mike Coupe needs to have a radical Plan B to save the business otherwise his days are numbered with the supermarket.

“Coupe was caught singing ‘We’re in the Money’ following the initial news that Sainsbury’s planned to merge with Asda. Today you’re more likely to hear Bonnie Tyler blasting down the aisles of Sainsbury’s supermarkets.

“Coupe is holding out for a hero: they’ve got to be strong and they’ve got to be fast otherwise Sainsbury’s problems will just get worse.”

Barclays/RBS

“The first quarter reporting season for the banks is off to a pretty sorry start with profit from Barclays coming in short of expectations.

“This is compounded by the news that the man who has been instrumental in moving Royal Bank of Scotland out of intensive care has resigned, a day before the company unveils its own trading statement.

“Although RBS’ shares have actually fallen under the five-and-a-half-year tenure of Ross McEwan, this is also true for its main rivals over the same timeframe and notably the company has returned to the dividend list.

“There is some reassurance to be gleaned from the fact McEwan will stick around until his successor is appointed. Whoever takes on the role faces an unenviable task with the company still stubbornly in effective public ownership and with work still to do to improve profitability.

“Barclays’ numbers will provide ammunition to activist investor Edward Bramson who wants the bank to shrink its investment banking division, after the unit reported an 11% drop in income.

“The argument it should be sticking to simpler stuff is reinforced by a better showing from its high street banking and credit card operations.”

Taylor Wimpey

“Although the immediate headlines look good, you don’t have to dig too deep into housebuilder Taylor Wimpey’s first quarter update to see why the market is reacting negatively.

“First the good news – the spring selling season has started well and the company flags robust consumer confidence.

“Unfortunately there isn’t too much else that is positive.

“The impressive sales rate may have been inflated by some extraneous factors including a bulk sale to a single investment buyer.

“’And there is a troubling step-up in the level of cost inflation which has been steady for the last few years at between 3% and 4%, but is now at 5%.

“This spells danger for the company’s level of profitability, particularly when you consider that asking prices are flat quarter-on-quarter.

“Guiding for a second-half weighting to its financial performance is never likely to inspire confidence – it’s often a precursor to a profit warning, while a reference to a ‘stable’ housing market is conservative in industry speak.

“All in all, this statement will create legitimate concerns about Taylor Wimpey’s prospects as well as shaking the foundations of the wider sector.”

These articles are for information purposes only and are not a personal recommendation or advice.


The daily market update is written by Russ Mould, AJ Bell’s Investment Director and his team. The article highlights the movement in the main index, winners and losers on the day and any macro-economic announcements.