Still 29% upside for Sainsbury's after Christmas results

by from interactive investor |

As Christmas trading is now such a big part of the Sainsbury's investment story, today's update presented a huge opportunity for CEO Mike Coupe to finally silence those who questioned his £1.4 billion acquisition of Argos.

The purchase only completed in September 2016, so the past few weeks offered the first Christmas and Black Friday period where Sainsbury's has been able to stamp its mark on the catalogue retailer's performance.

The verdict from the City today was that Sainsbury's had delivered a reassuring rather than overwhelming performance. Argos held its own in a clearly challenging marketplace, with record sales over the Black Friday period an achievement given strong comparatives with a year earlier.

There was the added bonus that Argos will generate bigger-than-expected cost savings in the current year, leading to a moderate upgrade to overall profit forecasts for 2017/18. However, general merchandise sales were still lower by 1.4% in the third quarter, having also fallen 1.6% in Q2.

The extent to which Argos has transformed the Sainsbury's investment case shouldn't be underestimated. One-fifth of all sales are now online, with much of this due to the popularity of Argos Fast Track delivery and collection.

And the group is now much more seasonal, with analysts estimating that Argos generates almost all its profits in the quarter including Christmas.

Sainsbury's should also benefit from the opportunity to drive footfall into its stores from the 165-plus Argos outlets now trading at its supermarkets.

There certainly appears to have been a positive impact over Christmas, with grocery sales up 2.3% and like-for-like sales 1.1% stronger across the group.

UBS analyst Daniel Ekstein said: "Sainsbury's has delivered reassuring trading through what, post the Argos acquisition, is its key quarter for sales and profitability."

He said grocery sales were showing "decent momentum" and were now back in the pack amongst the Big Four, having recovered from a softer previous quarter.

With Sainsbury's trading on a projected 2019 enterprise value/operating profit multiple of 9.7, Ekstein thinks there's more to come from the retailer's shares after a lacklustre past year. He has a price target of 325p, which compares with the 252p seen today after a 1.5% rise.

Richard Hunter, interactive investor's new Head of Markets, said there was no room for complacency from Sainsbury's.

He said: "The unrelenting pressure in the sector from the discount supermarkets, a potentially resurgent Tesco and recovering Morrisons, remains in evidence.

"For Argos, despite its bright start as part of the group, the elephant in the room that is Amazon will continue to cast a long shadow.

"The general merchandise numbers need to claw their way back to positive territory, whilst the general economic wariness in the UK is an overarching concern."

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.