Is Tesco's Loss J Sainsbury's Gain?

LONDON -- You won't need telling that these are tough times for Tesco (LSE: TSCO  ) (NASDAQOTH: TSCDY  ) . The big cheese of British supermarkets has found itself in one pickle after another, serving up the U.S. Fresh & Easy debacle, its first profit warning for 20 years, a 25% share price drop, and a dollop of minced horsemeat. It has even been shrinking in Asia, with sales dropping 3.8% in the first quarter, on top of a 1% fall in U.K. sales. Chief executive Philip Clarke has given up the fight to sell electronics, abandoning the field to online giant Amazon.

Then take a look at J Sainsbury (LSE: SBRY  ) (NASDAQOTH: JSAIY  ) . It has just reported its 34th consecutive quarter of like-for-like growth. Total sales for the first quarter rose 3.6%. Like-for-like sales rose 0.8%, excluding food. And while Tesco dumps electrics, nonfood sales at Sainsbury's are growing at twice the rate as food, notably in cookware, homeware, and -- ahem -- kitchen electricals. You really can taste the difference.

King or Clarke
Sainsbury chief executive Justin King sounds positively regal when he hails "a solid performance in what continues to be a tough consumer environment." At Tesco, Clarke sounds like an office junior when he grumbles, "We are not expecting economic conditions to improve in the near term." And no wonder, given their diverging share-price performance. Sainsbury is up nearly 30% over the past 12 months, while Tesco could barely muster 6%. And that's no flash in the pan: Over five years, Sainsbury is up 16%, while Tesco is down 13%. No longer the big cheese; more like stinky bishop.

Sainsbury has been grabbing market share since 2004, with year-on-year growth of 6.2% to today's 16.8%, according to retail analyst Kantar Worldpanel. Every little bit helps. That makes it the most successful of the big four, beating Asda and Morrison as well. Yet Tesco is still the big boy, with 29.7% of the market, down slightly from 30.1%.

Tesco's valuation is cheaper at 9.6 times earnings against 12.3 times earnings -- maybe that's what it means by its "Price Promise." This doesn't necessarily make it the bargain of the two; there are clearly good reasons for that relatively low valuation.

There is little to choose between Tesco's and Sainsbury's yields, at 4.3% and 4.4%, respectively, although Tesco has 2.4 times cover against Sainsbury's 1.8.

Invest well for less
Tesco's forecast earnings-per-share growth is miserably flat for the 12 months to February 2014, although it does rise to 5% thereafter. Sainsbury is forecast to grow 5% to next March and 6% to March 2015. So its growth prospects look stronger, its strategy is proven, and it is the form team. Right now, Sainsbury's future looks fresh and easy, words Tesco has good reason to dread.

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