Interactive Investor

ii view: income play Sainsbury's to ditch bank business

Generating free cash, hopes of a share buyback programme and a withdrawal from banking now precedes a strategy update. Buy, sell, or hold?

19th January 2024 15:30

Keith Bowman from interactive investor

Third-quarter trading update to 6 January

  • Grocery sales up 9.3%
  • General Merchandise sales down 0.6%
  • Clothing sales down 1.7%
  • Full-year profit guidance left unchanged

Chief executive Simon Roberts said

"We've worked hard to really deliver for our customers this quarter and have grown grocery volumes ahead of the market for the fourth Christmas in a row. More customers are choosing to shop at Sainsbury's, recognising our determined focus on value, product innovation and service.”

ii round-up:

Retailer Sainsbury (J) (LSE:SBRY) operates around 595 supermarkets, 820 convenience stores and 665 Argos stores, most of which are now located within a Sainsbury outlet.

Other group brands include Habitat, Tu and Nectar, along with Sainsbury’s Bank.

For a round-up of this latest trading update announced on 10 January, please click here

ii view:

Started in 1869 by John and Mary Sainsbury, the retailer today employs over 150,000 people. Its acquisition of Argos in 2016 leaves it with the UK’s third most visited website. A stock market value of £6.7 billion compares to Tesco (LSE:TSCO) at £20.9 billion, B&M European Value Retail SA (LSE:BME) at £5.2 billion and Ocado Group (LSE:OCDO) at £4.6 billion. Retailing generates most of its profits with financial services via Sainsbury’s Bank accounting for under a tenth in 2022.  

For investors, the tough backdrop for its customers including heightened mortgage and rental costs cannot be forgotten. Competition across the sector also remains intense, with General Merchandise sales down during this latest quarter. Group net debt of £5.6 billion compares to a stock market value of £6.7 billion, while its current full-year 2023 estimate of adjusted profit at between £670 million and £700 million compares to last year’s £690 million. 

On the upside, the focus on food continues to generate growth in grocery sales. A withdrawal from the banking business is now planned, with further details potentially being given at its 7 February strategy update. Expected free cash flow for the current financial year of at least £600 million underpins hopes of additional shareholder returns via a share buyback programme. A price-to-net asset value of under one compares to over five at Amazon.com Inc (NASDAQ:AMZN), B&M European and Greggs (LSE:GRG), suggesting the shares could be good value. 

For now, challenged general merchandise sales and likely pressured profits offer room for caution. However, management’s sharp focus on growing its food sales combined with a forecast dividend yield of over 4.5% look to provide firm reasons for income investors to stick with the shares. 

Positives: 

  • A cost saving programme ongoing
  • Attractive dividend payment (not guaranteed)

Negatives:

  • Elevated costs
  • Intense sector competition

The average rating of stock market analysts:

Hold

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