Sainsbury banks too late on reversing profits decline in a rotten year

STOCK MARKET WEEK

Sainsbury's bid to join the bankers club has come too late to prevent 1996 going down as a rotten year for the superstores chain, formerly the undisputed leader of food retailers.

The group, once seemingly immune from competition, is due to roll out interim profits on Wednesday; they are expected to be poor, straining investor patience. Until rumours of the banking foray started to circulate on Friday its shares had been bumping along at their year's low in anticipation of dismal figures and a feeling it had run out of ideas.

Four years ago the price seemed to be about to burst through 600p. It has, however been downhill ever since and last week the shares touched 349.5p.

Earlier this year the group endured its first profit fall for 22 years. Last month for the first time its stock market capitalisation fell below arch-rival Tesco which had already taken the lead in market share.

The next humiliation will be the interim figures. NatWest Securities is looking for a pounds 55m decline to pounds 396m with a year's out-turn of pounds 725m.

When Sainsbury was flying high, the cultural leader of the retailers, year's profits stretched to pounds 809m.

The group has undoubtedly been caught on the hop by the sheer competitive endeavours of its main rivals. It was slow to offer inducements, launching its Record incentive card rather late in the game. And it dismissed the so-called loyalty cards as "electronic Green Shield stamps". But the overwhelming success of the Tesco Clubcard with the added budget account facilities has clearly forced it to dive deep into the financial world.

Many observers believe Sainsbury needs a new strategy, one that will emphasise its seemingly lost virtue of being rather superior to the other big food players. The bold banking move could do the trick.

And it would be surprising if it does not announce further developments this week, such as more power for its Reward cards and another of the price campaigns retailers love.

However, Tony MacNeary and Mike Dennis, analysts at NatWest, highlight a problem that may not be addressed by the banking venture - a demographic time-bomb.

Sainsbury's customer profile is much older than, say, Tesco's. Indeed Sainsbury serves more older couples than any other superstore chain and has many more single oldies than Asda, Safeway or Tesco although, for some reason, recently floated Somerfield tops by a big margin the latter customer category. To compound the age problem Sainsbury, by and large, lags when it comes to younger customers going through its check-outs.

BAT Industries is another blue chip facing a multitude of difficulties. Its worries relate to the increasingly litigative nature of the world, which has encouraged people who willingly smoked tobacco to sue because their health subsequently deteriorated.

The group faces a series of actions in the US and the uneven decisions so far handed down are often price-sensitive, creating sharp share movements. Many in the City believe BAT would do itself - and its shareholders - an immense favour by joining the demerger trend that would at least have the merit of allowing a see-through valuation being put on its sprawling financial side.

When Sir James Goldsmith and friends unleashed their unsuccessful break- up bid BAT took the hint, unloading such businesses as the Argos catalogue stores and chain and paper group Arjo Wiggins Appleton. But for some odd reason, it decided to persevere with finance and tobacco, hardly an ideal combination.

Nine-month results this week are likely to be some 8 per cent higher at pounds 1.9bn with tobacco helped by sales in India and China and finance by a strong new business performance by Allied Dunbar.

Sainsbury and BAT, with their particular problems, have not featured in the autumnal stock market rally which lifted shares to a new peak at the start of last week.

Fund manager Brian Banks believe the investment outlook remains positive but warns there "can be no doubt that if the US market suffers a major setback it will have a knock-on effect in other world markets". But London's strong fundamentals, with profits and dividends increasing, could cushion any setback. Mr Banks, a former Jim Slater aide who heads Guildhall Investment Management, points out in his quarterly letter to clients that investors have become less alarmed about the possibility of a Labour government which historically has been good for shares. He adds: "The general consensus is that the UK stock market is fairly valued at current levels and if there was a turnround in political fortunes, although unlikely, the market could move into new high ground".

Richard Jeffrey at Charterhouse Tilney frets about the ease with shares are spooked by adverse news. He feels an interest rate increase after this week's Ken and Eddie meeting would help calm fears.

Whether interest rates remain unchanged or not one of the market's high- yielding shares is due to enjoy a dividend increase. Thames Water, as usual, kicks off the water reporting season and should achieve interim figures up 12 per cent or so to pounds 185m. With a more progressive dividend policy promised there are expectations of an 11 per cent increase to 10.2p.

Thames, like other utilities, could face a substantial windfall tax in the event of a Labour government, which would restrict its dividend payments.

Pilkington, the glass group, also offers interim figures. They are likely to be disappointing. The group has suffered from fierce competition and it is widely believed that price increases have not held. Around pounds 73m, down from pounds 104m, is the guess.

Body Shop International, with half-way figures of, say, pounds 11m against pounds 9.1m also graces the week's results list; so does mighty Shell Transport & Trading with third-quarter net income likely, despite higher crude oil prices, to be a little lower at pounds 1.1bn.