ii view: A fifth consecutive sales fall at Sainsbury's

Falling non-food sales weighed, but online sales rose. Is the dividend still the core attraction?

Third-quarter trading update to 4th January 2020

• Like-for-like (LFL) or same store sales excluding fuel fell 0.7%
• Total sales excluding fuel down 0.7%
• Non-food or general merchandise sales down 3.9%
• Clothing sales up 4.4%
• Total online sales up 5%

Chief executive Mike Coupe said:

"We gave our customers a great combination of quality food at good prices this Christmas and we delivered a standout performance operationally. We have a real sense of momentum in Sainsbury's and investment in our stores and improvements to service and availability have led to our highest customer satisfaction scores of the year.

"Our digital investments are also paying off and over 20% of our business was online in the quarter. Groceries Online had record order numbers throughout the Christmas period and customers are increasingly choosing to shop with SmartShop in our supermarkets. 

"The colder weather helped to deliver strong clothing sales in the quarter and our Christmas, party and gifting ranges were all popular with customers. Argos outperformed the market in consumer electronics, but the toy and gaming markets declined year on year.”

ii round-up:

Founded in 1869, J Sainsbury (LSE:SBRY) today has around 600 supermarkets, just over 800 convenience stores and more than 800 Argos stores in both stand-alone and supermarket locations. 

It served 32 million customers across Sainsbury's and Argos in the week before Christmas.

The retailer also operates Sainsbury’s Bank.  

For a round-up of this third-quarter trading update, please click here. 

ii view:

Food retailing is a tough and highly competitive market. Discount retailers Aldi and Lidl continue to grow their UK store portfolios, with Lidl, according to market researcher Nielsen, this year’s Christmas winner following a 12.2% increase in sales. Mid-range competitor Tesco (LSE:TSCO) is working hard on its recovery while Morrisons (LSE:MRW) is fostering a growing relationship with Amazon (NASDAQ:AMZN). At the high end, John Lewis is folding Waitrose management into its broader structure, while Marks & Spencer (LSE:MKS) is now partnering Ocado (LSE:OCDO) to grow its online food sales. 

For Sainsbury's itself, and following its government rejected merger with Asda, store closures and cost cutting have become the order of the day as it seeks to find its feet strategically. The business model at Argos looks to lend itself to online retailing, while over 20% of group business was conducted over the internet during the quarter. 

For investors, today’s update arguably offers little new direction. Previous news of cost saving initiatives and an increased emphasis on cutting debt were favourable. But change takes time and the competition isn’t standing still. For now, an estimated forward dividend yield of over 4% and covered almost twice by earnings, remains the core attraction. 

Positives: 

• Targeting cost reduction of £500 million over five years
• three-year net debt reduction target up to at least £750 million, from £600 million
• Attractive dividend payment

Negatives:

• Like-for-like sales (excluding fuel) have fallen for 5 consecutive quarters
• General Merchandise sales declined by 3.9%
• Factors outside of its control such as the weather can influence performance

The average rating of stock market analysts:

Hold