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Sainsbury - Sales growth rises, but challenges remain

George Salmon | 4 July 2017 | A A A
Sainsbury - Sales growth rises, but challenges remain

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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: 281.20 | Buy: 281.30 | Change 4.70 (1.70%)
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Excluding fuel, like-for-like (LFL) sales across the group rose 2.3% in the 16 weeks to 1 July 2017, which is marginally ahead of analysts' prior expectations. The shares rose 1.6% on the news.

Our view

When the Argos deal was announced, both businesses were struggling. We said that if CEO Mike Coupe could turn these two negatives into a positive, it would be a masterstroke. The early signs suggest some progress is being made, but there remains work to be done.

In its last update as part of Home Retail Group, Argos delivered like-for-like growth of just 0.1%. Recently, this figure has risen to over 4%. While a strong performance from Argos is heartening, Grocery remains very much the senior partner.

Despite Online and Convenience continuing to impress, continued weakness in Sainsbury's superstores means the outlook here isn't as bright. The store-within-a-store format eats up some excess sales space in the struggling stores, and a total of 250 Argos Digital stores are set to pop up in the group's bigger superstores within the next 2 years. This could boost footfall, but in reality we feel it's unlikely to have a transformative impact.

The deflationary pressures that have dogged the industry might be easing, but this isn't because competitive pressures are going away, rather that sterling's weakness is raising the cost of imported goods.

New challengers like Aldi and Lidl march on, and with traditional UK rivals unlikely to take a backwards step it's hard to see how profitability can be improved by engaging in a straight up slugging match. Sainsbury is instead seeking to differentiate itself by moving to serve customers wherever and whenever they like, through non-traditional services like Click & Collect. All in all, it feels like the right things are being done, but there are plenty of hurdles to overcome.

Mike Coupe seems to have the boat facing in the right direction, but given the strength of the current still flowing against it, one gets the feeling he'll need to row pretty hard to make any decent progress.

At present the shares offer a prospective yield of 4%, and trade at 12.6 times expected earnings.

First quarter trading update

Within the Grocery division, total revenue rose 3% compared to the 0.3% improvement seen in the previous quarter. While the inflationary environment is supporting growth through higher prices, transaction numbers are 2% ahead of last year, with like-for-like transactions improving in all areas.

Sainsbury says it has improved its price position versus competitors and had a good response to its 'Summer eatng' range. First quarter online Groceries (+8%) and Convenience (+10%) sales growth was also ahead of the previous quarter.

General Merchandise and Clothing also outperformed the wider market, with strong demand for the group's Fast Track delivery service. Sainsbury says that during the period of warm weather customers were drawn to the prospect of receiving their new summer purchases, such as paddling pools and fans, on the same day.

The group remains happy with the performance of Argos, where growth in the Mobile, Audio and Tech categories helped it grow market share. 36 Argos Digital stores were opened in Sainsbury's supermarkets, bringing the total to 75.

CEO Mike Coupe added: "The market is competitive and we continue to manage cost price pressures closely. Our strategy is delivering and we are well placed to navigate the external environment."

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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.