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Sainsbury's: Sales volumes grow but food price deflation continue

George Salmon | 8 June 2016 | A A A
Sainsbury's: Sales volumes grow but food price deflation continue

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

Sell: 279.00 | Buy: 279.30 | Change 1.00 (0.36%)
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Sainsbury shares were up by over 2% this morning after the company released a first quarter trading update.

Despite like-for-like (LFL) transaction growth and total volume growth, LFL retail sales are down 0.8% (excluding fuel) as food price deflation continues to impact. Sainsbury removed 'Brand Match' and many 'multi-buy' offers to focus instead on lower regular prices. As a consequence, the proportion of promotional offers within baskets has fallen to 23% from 30% last year.

Overall, total retail sales (excluding fuel) were up 0.3%, assisted by new store openings.

Convenience sales continued to grow (+6%) as seven new stores were open in the quarter. Online sales increased by over 8% and a new online groceries app was launched.

Clothing sales continue to grow, up nearly 5%. Vinyl records were reintroduced in March, contributing to a General Merchandise growth of 5%, while Sainsbury's bank continues its good performance.

Mike Coupe, Sainsbury CEO acknowledged that market conditions are still challenging, but remains confident that Sainsbury's strategy to be a trusted multi-channel, multi-product and services retailer leaves the group well-positioned.

Our view:

As completion of the deal to purchase Argos moves ever closer, Sainsbury are now at a crossroads. CEO Mike Coupe has himself admitted that the deal is a career defining moment. Sainsbury remains tight-lipped on this deal, and a further update can be expected with the interim results.

Sainsbury, like all of the large UK supermarkets, has come under pressure from price deflation and the rise of Lidl and Aldi, and is finding that its superstores in particular are struggling. Sainsbury are now stamping on the brake pedal and added just a half-dozen new large supermarkets last year.

Argos had over £4bn of sales in 2015, and offers Sainsbury the chance to significantly increase their exposure to non-food markets. Investors will hope that setting up Argos concessions within larger stores will simultaneously drive footfall and solve any excess sales space problems. Hopes will be high as the performance of 10 trial concessions was sufficient for Sainsbury to press on with the deal. Sainsbury are hoping to achieve around £75m of synergies from these space-saving concessions, amid total savings of £160m p.a. Integrating Argos' delivery network could also benefit Sainsbury's online offering. The cash cost of the takeover is minimal as Sainsbury's Bank can refinance Argos' loan book, releasing around £800m of cash, replacing much of the funds spent on the deal.

On paper then, the deal looks reasonable. However, as things stand both businesses have problems of their own to deal with, having reported falling profits. It is clear that Mr Coupe can see the challenges facing the businesses, for example the importance of developing importance of multi-channel customer relationships. What's less clear is whether Sainsbury's or Argos can actually make decent money from any channels other than the old ones.

If he can sum two negatives and make a positive, it will be a masterstroke. In the meantime, the shares are forecast to yield over 4% and are on a PE of c. 11.5x.

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 for more information.