Interactive Investor

ii view: Sainsbury’s focuses on right things

Upgrading profit expectations and offering an attractive dividend yield. We assess prospects.

24th January 2022 15:45

Keith Bowman from interactive investor

Upgrading profit expectations and offering an attractive dividend yield. We assess prospects. 

Third-quarter trading update to 8 January

  • Total sales excluding fuel down 5.3%

Guidance:

  • Expects to report underlying pre-tax profit of at least £720 million up from at least £660 million

Chief executive Simon Roberts said

"I am really pleased with how we delivered for customers this Christmas. More people ate at home and our significant investment in value, innovation and service led to market share growth.

“Offering great value will be more important than ever this year and we have just launched our bold new Sainsbury's Quality Aldi Price Match campaign, which targets 150 fresh products that customers buy most often.”

ii round-up:

Founded in 1869, Sainsbury's (LSE:SBRY) today has over 600 supermarkets, 800 convenience stores and around 1,000 Argos locations in both stand-alone and supermarket locations.  

The retailer also operates Sainsbury’s Bank.  

For a round-up of this latest 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. Tesco (LSE:TSCO) is working hard on its reset strategy and Morrisons has now been acquired by a US private equity firm Clayton, Dubilier & Rice. At the upper end, Marks & Spencer (LSE:MKS) has partnered up with Ocado (LSE:OCDO) to grow its online food sales. 

For investors, supply chain challenges and the fall in general merchandise sales cannot be overlooked. UK inflation at a near 30-year high is likely to generate wage pressures across the economy, while competition remains intense as the discounters continue their battle and the new owners at Morrisons look to up their game. 

On the upside, grocery sales proved better than expected during the quarter. Costs continue to be tackled and the performance of its banking business is now moving in the right direction. Strong free cash flow also underwrites potential for increased shareholder returns at some point. In all, and with the shares now standing on a forecast dividend yield of over 4%, income seekers at least are likely to remain loyal. 

Positives: 

  • Online sales almost doubled compared to the pre-pandemic Q3 2019
  • Executing a cost reduction programme

Negatives:

  • General merchandise sales down 16% year-over-year
  • Intense sector competition

The average rating of stock market analysts:

Hold

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