the second and fourth largest UK supermarket chains have seen sales rise by at least 4% thanks to store renovations and more fresh food
J Sainsbury, the second-largest UK supermarket chain, and Safeway, the number four, were expected to report growth of at least 4% in second-quarter sales after winning consumers by renovating stores and putting more fresh produce on the shelves.
J Sainsbury said fiscal second-quarter sales at stores open a year or more rose 5.3% after it renovated outlets at night to avoid inconveniencing shoppers.
Total sales at the company, which uses the 'Naked Chef' author Jamie Oliver in ads, rose 7.7% for the 16 weeks to 13 October as it renovated 36 stores and enlarged three.
'There really aren't any words of caution,' said Peter Jones, an analyst with Peel Hunt who rates the stock a hold. 'Full-year earnings are going to be better than expected.'
The increase marks the third successive quarterly rise in same-store sales and beats the 3.4% gain in Marks & Spencer's food sales in the quarter ended 29 September. Still, Safeway has increased sales at least 5% in the past seven quarters.
Sainsbury's share price rose as much as 17.75p, or 5%, to 375.5p. Overall this year, the stock had fallen 9.9% through 23 October, compared with a 15% gain for Safeway.
Chief executive Sir Peter Davis said in July that second-quarter sales growth would slow from the first quarter's 5.6% as the company worked on the stores, almost 10% of its outlets. Renovating stores can hurt sales temporarily by reducing the selling area and increasing congestion.
'We're paying quite a lot of extra costs to minimise the disruptions,' Davis told reporters in a conference call. On average, stores were closed only a week at the peak of work, he said. 'We are putting much more labour into the refurbishment.'
Davis said sales were also helped by a new line of regional Italian dishes and its new Blue Parrot Cafe food products.
'Both Sainsbury and Safeway are well managed businesses that are increasing their market share and that's down to their own efforts,' said Richard Perks, an analyst with industry consultant Retail Intelligence. 'This is against a background of very strong demand generally.'
The gains at Sainsbury and Safeway include sales from part of October, showing that demand for food and household goods is holding up even after UK consumer confidence fell in September, analysts said.
Using only responses after the 11 September attacks would have given the lowest consumer confidence score in a year, according to a survey by research firm GfK Great Britain.
The sales updates come ahead of first-half profit to be reported by Sainsbury on 21 November for the six months ending 13 October.
Safeway is scheduled to publish its interim report 22 November for the fiscal half ending 13 October.
The revival at Safeway, whose UK ranking fell to fourth from third in 1997, is ahead of Sainsbury's, and is reflected in the share prices, analysts said.
The gains made by Safeway, make it the best-performing supermarket stock on the FTSE 350 food and drug retailers index.
Still, Safeway shares are relatively inexpensive at 13.6 times estimated full-year earnings compared with the UK industry average of 16.7 times.
Sainsbury trades at 16.6 times estimated earnings and market leader Tesco trades at 19.2 times.
Safeway's strategy of attracting customers through big promotions on specific items without cutting overall prices is of concern to some analysts. 'I don't feel their pricing policy is the right one,' said Perks. Sainsbury, which in September announced £100m of price cuts across a broad range of products, is pursuing a safer route, he said.
'With Sainsbury, I think you will begin to see some sort of recovery, if not this quarter then later,' said Perks.
The Safeway strategy has the potential to generate higher returns, according to JP Morgan analyst Marc de Speville.
Safeway plans to spend £300m remodelling and extending stores this year. Around 250,000 square feet of new selling space will be added which will be devoted to specialty fresh produce such as pasta, meats and fish.
Chief executive Carlos Criado-Perez, a former executive of Wal-Mart Stores, has increased same-store sales by 5% or more for the past seven quarters. Sainsbury's growth rate lagged that until the first quarter of this fiscal year.
'The recovery at Safeway not only is happening, but continues,' said Andrew Kasoulis, an analyst at Credit Suisse First Boston who rates the shares a buy. 'At Sainsbury, the jury is still out and I'd expect that to remain the case for another year or so.' Kasoulis rates Sainsbury a hold.
Sainsbury's recovery program under Davis will take longer, analysts said. Davis, who took over in March 2000, has refitted stores, introduced new promotions and added product lines such as Blue Parrot Cafe children's foods.
He has had to deal with a legacy of under investment inherited from past management, analysts said.
'It's too early to say whether Sainsbury will outperform (the market) going forward because the comparatives are still fairly weak,' said Brian Gallagher, a fund manager at Gartmore who is responsible for investments worth £800m.
Putting the tech into protection
Square Mile’s series of informal interviews
Fallout from Haywood suspension
Launching later in 2019
£80bn funds under calculation