ii view: Sainsbury’s laser-focused on food fight

Third-quarter trading update to 3 January

• Total sales up 3.9% to £10.03 billion
• Grocery sales up 5.4%
• Sainsbury’s general merchandise and clothing sales down 1.1%
• Argos sales down 1% 

Guidance:

• Continues to expect annual adjusted retail profit of more than £1 billion, potentially exceeding last year’s £1.03 billion

Chief executive Simon Roberts said

"We have won grocery market share for the sixth consecutive Christmas period, again delivering our winning combination of value, quality, service and availability for customers. 

“We have real confidence in our momentum as we head into the final quarter and remain focused on helping our customers get great value for money and delivering for all our stakeholders."

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ii round-up:

Retailer Sainsbury (J) (LSE:SBRY) operates around 600 supermarkets, 855 convenience stores and 660 Argos stores, most of which are now located within a Sainsbury outlet.

Other group owned brands include Habitat, Bush electrics and Nectar, with most of its Sainsbury’s Bank operations sold to NatWest. 

For a round-up of this latest trading update announced on 9 January, please click here. 

ii view:

Begun in 1869 with a shop in London, Sainsbury's today employs around 140,000 people. The FTSE 100 retailer acquired Argos in 2016. Initiatives under management’s ‘Next Level’ strategic push out to March 2027 include putting food first and growing food volumes ahead of the market, cutting costs by £1 billion, and generating profit leverage from sales growth. Competitors include Tesco (LSE:TSCO), Marks & Spencer Group (LSE:MKS), Ocado Group (LSE:OCDO) and even food-on-the-go providers Greggs (LSE:GRG) and WH Smith (LSE:SMWH).

For investors, falling non-food sales including those sold under the group’s Argos banner cannot be ignored – non food accounted for 22% of revenues during this latest period. Sainsbury’s efforts to differentiate itself from rivals given intense price competition from discounters Aldi and Lidl, plus its own premium ranges competing against those of Waitrose and Marks & Spencer, are ongoing. An estimated price/earnings (PE) ratio above the three- and 10-year averages may suggest the shares are not obviously cheap, while increased UK taxes on employees have raised costs.  

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On the upside, food volume growth is ahead of the wider market with growth in grocery sales of 5.4% during Q3 exceeding City estimates of 4.9. That suggests success for management's food first initiatives. Further cost savings of £1 billion by March 2027 continue to be pursued. An ongoing expansion of the group’s Nectar loyalty scheme continues to offer enhanced data opportunities, while expected higher cash flows over the full year support continuing investments and potential shareholder returns.

For now, and despite ongoing risks, a consensus analyst estimate of fair value above 345p per share and forecast dividend yield of more than 6% appear to offer grounds for long-term optimism.  

Positives: 

• Management improvement programme
• Attractive dividend payment (not guaranteed)

Negatives:

• Exposure to pressured consumer spending
• Intense sector competition

The average rating of stock market analysts:

Buy