Mike Coupe

Mike Coupe delivered quite a surprise to the City – and investors – this morning as Sainsbury’s upgraded its profits forecast for the first time in years, with its best like-for-like sales performance since the third quarter of 2013 to boot.

And in a week when industry disruptor Aldi also reported falling profits as it felt the pinch of the price war, there seem to be glimmers of sunlight to feed the green shoots of recovery for the beleaguered traditional supermarkets.

The JS news sparked a frenzy of activity from analysts, who were expecting a run-of-the-mill trading update. Notes were fired out headlined “Sexy Sainsbury?”, “Hold onto your hats. Good news from the British supermarket scene!”, “Closing the gap with the leader”, “bullish statement” and so on.

Total retail sales for the second quarter were up 0.3% (excluding fuel) as Sainsbury’s opened 27 more convenience stores, expanded the number of click & collect sites to 52, grew online sales 15%, saw Taste the Difference volumes rise 4% and benefited from a 13% jump in clothing sales. Like-for-like sales still declined 1.1% (better than analyst expectations of 1.3%) in the tough deflationary environment. But the main talking point was Coupe’s confident prediction – just four days into the financial second half – that full-year profits would be ahead of the £548m the supermarket has previously guided as sales and cost savings raced ahead of expectations.

The other exciting (for the supermarket sector) line from Coupe flagged up growing volumes and transactions as the “decline in average basket spend in supermarkets continued to stabilise”. “Whilst the market is clearly still challenging, with food deflation impacting many categories, we are making good progress on delivering our strategy,” he continued.

This talk of a slight calming of the turbulent market has sent shares in Sainsbury’s rocketing more than 14% today to 261.9p, wiping out the falls of the past month (the stock closed last night at 229.3p). It carried Tesco and Morrisons with it (up 7.7% to 184.5p and 6.1% to 165.6p respectively) on a wave of optimism – at least in the short term – for the listed grocers.

Back in June, Coupe cautiously speculated after the quarter one update that the 2.1% like-for-like sales decline could signal the “low point of the cycle”. He was in much more buoyant mood today in a conference call with journalists. “Things are certainly not getting easier, but we’re more optimistic about Christmas this year than we have been in the past,” he said.

Bruno Monteyne at Bernstein agreed the results represented a change of tone for Sainsbury’s. “It has tried to take a cautious message up to now,” the analyst added. “That it is talking up guidance is now showing they are more confident in their strategic position. Sainsbury’s is doing better than even they expected.”

However, industry headwinds remain, with a 15% price gap to Aldi and Lidl likely to lead to persisting deflation as the big four somehow attempt to close the chasm, Asda in desperate need to recover tumbling sales and the ongoing impact of the living wage.

Analysts at Jefferies also warned Tesco had yet to show its hand. “Our expectation is that the UK market leader may need to step up efforts into the Christmas run-up, while the more structural risk for Sainsbury is that of accelerated discounter openings in the south of the country,” the firm said. Clive Black at Shore Capital, which upgraded Sainsbury’s shares from ‘sell’ to ‘hold’ today, pointed out that UK grocery remained a potentially volatile sector. He added a return of the price war would also harm Sainsbury’s margins as it would be forced to invest more to remain competitive.

Much has been written about the death of the traditional supermarket, with falling like-for-like sales now an industry norm as the big four cut back on big openings and Aldi and Lidl snap up all available space. But lost in the doom and gloom of Asda’s 4.7% Q2 sales slump was the fact that the retailer had maintained profitability – no easy task. And Waitrose also recently surprised many as operating profits in the first half fell by significantly less than expected.

Sainsbury’s upgrade to profits today may well show that those green shoots Asda CEO Andy Clarke identified in the summer turn out to have some substance. We’ll know more next week when Tesco reports its first-half figures.