Coronavirus - we're here to help
From how to access your account online, scam awareness, your wellbeing and our community we're here to help.

Skip to main content
  • Register
  • Help
  • Contact us
  • Log in to HL Account

Sainsbury - Market share gains in a tough environment

Steve Clayton | 13 January 2016 | A A A
Sainsbury - Market share gains in a tough environment

No recommendation

No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Sainsbury (J) plc Ordinary 28,4/7p

Sell: 194.95 | Buy: 195.00 | Change -3.80 (-1.91%)
Chart View factsheet

Market closed | Prices delayed by at least 15 minutes | Switch to live prices

Sainsbury's third quarter trading statement shows growth in transactions and like-for-like volumes, but negative LFL retail sales values, reflecting ongoing price deflation. LFL sales were down 0.4% excluding fuel, and down 1.8% including fuel. The company said that Christmas week saw over 30m customer transactions, an increase of 2.6% on the previous year.

As usual for Sainsbury, in an odd-numbered quarter, little financial detail is provided, but the company highlights their growth online, where sales rose nearly 10%, with orders up 15% and the business hit a new record for weekly orders, delivering over 289,000 customer orders.

Convenience had its biggest ever day on Christmas Eve, and the Click and Collect estate has reached 101 locations. Customer service levels were strong, as highlighted by seven wins out of twelve in The Grocer 33 weekly survey for Service and Availability.

The programme to lift own label quality continues on track. A launch of Taste the Difference wines delivered 18% growth for the category. Eventually, over 3,000 products will have been improved.

In non-food, sales rose 5% with clothing up 6%, despite the weather. The bank delivered 11% loan growth and 29% higher travel money transactions.

No profit numbers are provided, but like Morrison before them, Sainsbury claim to have taken market share in the quarter and now see second half LFL sales likely to be somewhat better than the -1.8% (ex-fuel) achieved in the first half of the year. One new supermarket opened in the period, plus sixteen convenience stores. There are now 600 supermarkets and 757 convenience stores in the estate.

No further information relating to any possible new bid approaches to Home Retail Group was released.

The shares opened almost 2% lower, following a strong bounce the previous day.

Our view:

Signs of recovery keep emerging at Sainsbury, with the Q3 numbers and improved H2 guidance all suggesting a business that is regaining some traction. Some will snipe that these numbers were not as strong as Morrison's, but frankly, given where Morrison were starting from, it is not really a fair comparison.

Sainsbury were the first of the Big 4 to report an improvement in conditions, when they gave a second quarter trading update a few months ago. Since then the evidence of progress in the face of strong headwinds has mounted.

The bid approach for Home Retail Group has muddied the waters, but hopefully some clarity on this will emerge before long. We do worry that trying to achieve a step-change in business performance by taking on a business in the throes of its own turn-around could be a step too far. But there is no denying that synergies on distribution, online capabilities and sourcing should all be possible, along with head office rationalisation.

Price Match kept Sainsbury competitive at the till, even if they look to be more expensive than rivals at the shelf edge, though obviously there is a real gap still between them and the discounters. Now, their move toward lower everyday prices, with fewer promotions is improving availability, freshness and sales.

Asda's own Income Tracker survey has recently been showing a useful rise in households' discretionary spending power, as rising employment and lower fuel prices feed into incomes. That could provide some respite for Sainsbury and its peers if people choose to spend the extra money in the aisles.

There are a lot of moving parts here. The core supermarkets are going to continue losing sales to Convenience and online, because of changing shopper behaviour, before we even consider what the competition might get up to. The Bank is a source of upside, but only once the costs of setting it up properly are back under control.

Free cash flow should improve from here, due to the lower capex plans. A lower dividend bill helps too. Analysts are expecting Sainsbury to generate EBITDA of about £1,230m per annum for the next few years. Take off £200m or so for the dividend, about the same again for tax and £450m for capex and there is still quite a lot of cash left over, so debts ought to fall quite quickly.

If trading continues on its new, positive trajectory, then eventually, that cash might head toward shareholders. In the meantime, sticking to the dividend cover target of 2.0x suggests that the stock might yield around 4%, given that analysts were pencilling in earnings per share of 20-24p for the current year.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.