Shares in Sainsbury's rose 1.5% following the release of its Christmas trading statement.
In addition to the trading details, Sainsbury said it anticipates this year's underlying pre-tax profits to be moderately higher than the £559m analysts had been expecting. This is due to the Argos business being integrated into the wider group more efficiently than had been expected.
When Sainsbury's announced it was buying Argos, both businesses were struggling. We said that if CEO Mike Coupe could turn these two negatives into a positive, it would be a masterstroke. Progress has been good so far, especially at Argos. However there's still plenty left to do.
Top of the list is getting the core Grocery division firing again. A strong Christmas provided a welcome tonic, and Online and Convenience have been merry and bright for some time. However, these extra sales are coming at the expense of Sainsbury's supermarkets.
Its superstores may be declining in popularity, but they are still a significant fixed cost. Sainsbury is trying to tackle the problem by rolling out Argos stores inside its supermarkets. This store-within-a-store format could simultaneously boost footfall to both destinations, but we feel it's unlikely to have a transformative impact.
The deflationary pressures that have dogged the industry are easing, but this isn't because the ferocious levels of competition are dying down. On the contrary, Aldi and Lidl continue to grab market share and UK-based rivals are working to lower prices. Instead, it's more a function of sterling's weakness raising the cost of imported goods, which has the knock-on effect of lifting prices on the shelves.
At 4.4%, the shares offer the highest prospective yield in the sector. An attractive prospect, especially with the recovery potential attached. However, we think there's plenty of work left to do before this potential is realised. In the near term, margins look set to remain stubbornly around the 2.5% mark, so meaningful dividend growth is by no means guaranteed.
Third quarter trading details
Third quarter like-for-like (LFL) sales excluding fuel rose 1.1%, an improvement on the 0.6% seen in Q2.
This was driven by the Grocery business, where the Taste the Difference and 25p veg lines were singled out as strong performers. Total Grocery sales growth was 2.3%, boosted by the Online (+8.2%) and Convenience (+7.3%) channels. Same day Groceries Online is now available from 93 stores, covering 38% of UK households.
While third quarter sales in General Merchandise dipped 1.4% and Clothing growth slowed from 6.3% in Q2 to just 1%, both are said to have outperformed their markets.
Sainsbury says Argos is growing market share. Video games consoles such as Xbox One X and Nintendo Switch proved popular, as did mobile phones and smart audio devices. 52 Argos stores were opened in Sainsbury's supermarkets, bringing the total to 164. Another 21 expected to open in the final quarter.
In Sainsbury's Bank, the active customer base has increased 8%, with records broken for car and home insurance sales.
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.
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