Sainsbury's a rare riser on grim day for FTSE 100

A terrible performer since the Asda deal was blocked, our head of markets analyses these better results.

The collapse of the Asda merger has prompted Sainsbury's (LSE:SBRY) to have the drains up on its own business, as it announces an ambitious strategic review within this second-quarter trading statement.

The company is embarking on a five-year plan to reduce costs by £500 million, honing its cost/income ratio, undertaking a full evaluation of its store estate and withdrawing immediately from new mortgage sales. 

Part of the savings within the store review will be the closure of some standalone Argos stores, which will be replaced by an in-store presence at selected Sainsbury's outlets.

At the same time, a planned reduction of net debt along with these measures should free up additional cash flow which, apart from allowing further investment into its successful convenience store chain, should also result in the comfortable dividend cover being maintained. The current yield of 5.2% has been a rare chink of light in recent times for investors.

Source: TradingView Past performance is not a guide to future performance

In terms of trading in the 12 weeks to 21 September, the numbers are something of a mixed bag. An overall like-for-like decline in sales of 0.2% was partially due to a dip in General Merchandise of 2%, although the figure was mitigated by Grocery (up 0.6%) and Clothing (up 3.3%). The integration of Argos ahead of both plan and budget has been a highlight, and while conditions remain difficult, that part of the business continues to make a valuable contribution to the group.  

The strategic review will need careful management, however. In a notoriously competitive sector, and as seen in the past on numerous occasions, rivals move on rapidly, which can leave a company in the midst of a transformation behind. 

A combination of factors will also harm underlying first-half pre-tax profit to the tune of £50 million, although full-year underlying pre-tax profit is still expected to be in line with City consensus estimates of £632 million. The phasing of cost savings, higher marketing costs, poor weather and stronger comparatives have contributed to a fairly flat overall performance for the period.

With Asda out of the strategic equation, the hard work now begins in reshaping the Sainsbury's offering, both in terms of financial streamlining as well as maintaining market share, margin and of course profit. 

The share price has had a chequered time of late, with more recent optimism driving the price up 12.5% over the last three months. Over the last year, however, the shares remain in the doldrums, having lost 33%, as compared to a 2.9% decline for the wider FTSE 100 index. 

In terms of market consensus, there is considered to be better value elsewhere in the sector, with Tesco (LSE:TSCO) comfortably being the preferred play, although the general view of Sainsbury's has at least recently ticked up to a ‘hold’ from its previous 'sell' rating.