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Sainsbury - Q4 Trading - Positive like-for like sales

Steve Clayton | 15 March 2016 | A A A
Sainsbury - Q4 Trading - Positive like-for like sales

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

Sell: 190.60 | Buy: 190.70 | Change -0.20 (-0.10%)
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Sainsbury revealed that Q4 was their first quarter of positive (ex-fuel) like-for-like (LFL) sales in over two years, with total sales up by 1.2% and the LFL number just edging into positive territory at +0.1%. The shares opened 1% lower, in a weak wider market.

The group reveal that Gok Wan's 22nd collection has had its best ever February, helping clothing to 10% growth. Entertainment grew by 11% and the Bank saw double digit sales growth in insurance and Travel Money. Own label development marches on toward Sainsbury's target of improving 3,000 products, and they tell us that their sprouting grain boule is high in fibre.

The group is committing to dropping the vast majority of multi-buy promotions, to focus on keener prices on single items, whilst spending £1m to stop people in Swadlincote, Derbyshire wasting so much. Service continues to run at high levels, as measured by independent The Grocer 33 weekly surveys. Online sales rose by almost 14%, with orders up almost 19% and the group opened one new supermarket and 16 convenience stores during the quarter.

Not a word was said about the potential bid for Home Retail Group, owner of Argos.

Sainsbury is facing a "put up or shut up" deadline from the Takeover Panel of Mar 18, as are Steinhoff of South Africa, their rival bidder. If either makes a firm bid, the Takeover Panel will then extend the other's deadline by 53 days. At present, the Steinhoff proposal is the higher value.

Our view:

The Q4 trading update confirms the now well established image of Sainsbury as a business in recovery from the traumas of the past. Positive LFL numbers are a symbolic milestone along this road.

Price Match kept Sainsbury competitive at the till, 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 shows households' discretionary spending power up almost 7%, 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 approaching 4%, given that analysts were pencilling in earnings per share of 22p for the next year or two.

But all of that is subject to radical change, depending on the outcome of the bid for Home Retail Group, owner of Argos. At the moment, Sainsbury are the under-bidder and must decide whether to raise or not. Success would bring in around £4bn a year of non-food sales to the group, with the scope for rationalising store networks. The combined store portfolio adds huge possibilities to click-and-collect options, along with the advanced home delivery capabilities that the two businesses have between them.

But Argos has been a serial underperformer and a recent sales update was hardly buoyant. So lots of potential, if it goes right, but plenty of potential for it to go wrong too. Or Sainsbury could be outbid, or Home Retail shareholders might just turn an offer down. So uncertainty abounds, but either Sainsbury, Steinhoff, or both are likely to reveal their hands in the next few days, given that Takeover Panel deadline of Mar 18 to "put up, or shut up".

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.