Outlook: Sainsbury isn't working. Someone should pay

Boots shocker; Telegraph saga

The 35p a share J Sainsbury promises to return to shareholders from the sale of Shaw's in the US, sugars the pill a little, but there was no disguising the awfulness of yesterday's trading update from the number four in the supermarkets league table. The City had expected some improvement in like-for-like sales for the fourth quarter, if only a marginal one. The reality was a near 1 per cent fall, this despite substantial price promotion.

The 35p a share J Sainsbury promises to return to shareholders from the sale of Shaw's in the US, sugars the pill a little, but there was no disguising the awfulness of yesterday's trading update from the number four in the supermarkets league table. The City had expected some improvement in like-for-like sales for the fourth quarter, if only a marginal one. The reality was a near 1 per cent fall, this despite substantial price promotion.

Cost cuts notwithstanding, the bottom line is that profits for the year just past were almost certainly down on last time's £695m. After stripping out tax and the contribution made by the now departed Shaw's supermarkets chain,, there's barely enough money left to pay the group's £300m annual dividend bill. Small wonder that Standard & Poor's cut the company's credit rating yesterday. If the three-year transformation programme doesn't deliver the promised turnaround soon, Sainsbury will have to start cannibalising itself in order to maintain the dividend.

Up until now, I've always thought Sir Peter Davis, the chief executive, deserves the benefit of the doubt. He inherited a neglected wreck of a company when he took over, and he's had to run hard just to stay still. The City is not so charitable, and were it not for the continued support of the Sainsbury family, which owns nearly 40 per cent of the stock, Sir Peter's planned elevation next week to the chairmanship would undoubtedly have been vetoed. Sainsbury has become a never ending story of recovery delayed. Wait a little bit longer, we are constantly told, and the turnaround story will soon become evident.

You'd have thought that after three years of treatment, the patient would by now be back in robust health. No such luck. Instead, we are asked to suspend our judgement yet again, at least until the transformation programme is fully complete this summer. By then, Sir Peter will be safely ensconced in the chairman's suite, and it will be largely someone else's problem. Justin King, who starts as chief executive on Monday, must be wondering what he's taken on.

Sainsbury says that what's not being paid out by way of special dividend from the Shaw's disposal will be ploughed back into investment. Twenty stores are to be acquired, most of them presumably from the newly merged Morrison and Safeway, which is required by the competition authorities to make disposals as a condition of the merger.

Unfortunately, this hardly amounts to a transforming deal for Sainsbury, and with the competition growing more intense by the day, the company is fast running out of places to hide. Margins are already lower than the industry standard, so there's little more the new man at the helm can do in terms of price promotion without further cutting into his bottom line. The middle ground that Sainsbury aims to occupy between the everyday low prices of Tesco and Asda and the more upmarket Waitrose and Marks & Spencer seems fast to be disappearing.

Sir Peter says he's prepared the ingredients; it's now up to Mr King to cook the meal. Yet I fear it will be Sir Peter's goose that is cooked first. If he's still there to celebrate his planned retirement date in July next year, it truly will be a wonder to behold.

Boots shocker

Time for a reality check. The Boots share price has been powering ahead ever since Richard Baker joined the company as chief executive from Asda a little less than a year ago. Early signs of progress looked encouraging, with Christmas sales much better than generally anticipated. Yesterday, Mr Baker brought expectations back to earth with a bump. By the time he's through with his price-cutting campaigns, nearly one and a half percentage points will have been trimmed from the gross margin. In addition there's to be a grand total of £390m of expenditure on modernisation, improved efficiency and store investment, approximately £140m of which will be expended against revenues. There's also to be a £40m pension fund top up.

Mr Baker acknowledges the short term damage to his bottom line, but insists that he had to address a legacy of underinvestment in the core Boots the Chemist chain, and that the extra spending will produce a strong performance for the group starting a year from now. Now where have you heard that before? See above.

His comments failed to reassure the stock market, where the shares plunged nearly 13 per cent. Mr Baker's plans for reinvigorating the chain seem fair enough, but does he really need to spend so much money on them? If nothing else, yesterday's outpouring of initiatives has served to remind investors of the strategic bind that Boots the Chemist finds itself in.

With some of the best margins in retailing, but with all traditional high street chemists increasingly under siege from the big supermarket groups, there appears to be only one way the company can go. What about larger out of town outlets, suggests Mr Baker. It's hard to see how that can be the answer either. Just defending the fort will be difficult enough. Extending the territory is going to be a good deal tougher.

Telegraph saga

And then there were ... 10? Confirmation that Richard Desmond, owner of the Daily Express, hasn't made it to the next round of bidding for The Daily Telegraph hardly narrows the field by very much, even though it will come as a huge relief to the newspaper's beleaguered army of hacks. Yet he was one of the more serious bidders, and pre-emption rights over the Telegraph's 50 per cent stake in West Ferry Printers give him a continuing interest in the outcome. His insistence that he was trying to buy a business, not a trophy asset, is also instructive.

There may still be quite a number of interested parties going through to the next round, but there can in the end be only two finalists, bar the wild card, of course. For the time being, only the Barclay brothers seem prepared to pay the trophy asset price demanded, which is somewhere well north of £600m. Private equity purchasers surely can't match the secretive duo, with their collector's interest in owning the titles and their deep pockets to match. On the other hand, the Daily Mail probably could. There are potentially huge advertising, backroom, printing and distribution synergies to be gained from combining the two stables.

The drawback is that the Daily Mail faces certain reference to the Competition Commission. The Mail is hated at No 10, and though it has been deliberately courted by No 11, competition issues alone would be sufficient to ensure a lengthy inquiry, with no certain outcome at the end of it. And the however is? However, there are plenty of ways of skinning a cat. The Daily Mail could offer to buy the titles unconditionally, taking the regulatory risk on its own back and using a private equity partnership such as Cinven as a backstop to acquire the business if the deal is eventually blocked.

Lord Rothermere, the chairman, is young and hungry to make his mark, but he's no fool and he's well advised. A less high-risk approach would be to take a minority holding in a bidding consortium, of say rich Tory supporting entrepreneurs and financiers who would quite fancy owning a slice of The Daily Telegraph. In that way, the Daily Mail could combine the attributes of a trade and a trophy asset bidder. Whatever path Lord Rothermere chooses, the saga of the Telegraph's ownership still seems a long way from resolution. Lazard Brothers, the presiding investment bank, has yet to decide whether selling the titles is the best approach for Hollinger International in the first place.