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Sainsbury - sales down amid tough conditions

George Salmon | 3 July 2019 | A A A
Sainsbury - sales down amid tough conditions

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

Sell: 190.50 | Buy: 190.70 | Change -1.90 (-0.99%)
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Sainsbury's first quarter retail sales, excluding fuel, declined 1.2%. On a like-for-like basis, the fall was 1.6%.

The group said conditions remain tough, and the consumer outlook continues to be uncertain.

The shares fell 1.6% following the announcement.

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Our view

Things have been difficult for a while at Sainsbury. Sales have failed to inspire, and we think it's hard to see that changing soon.

The grocery sector has always been competitive, but it's now more crowded than ever. Aldi and Lidl offer cheaper alternatives, then there are more upmarket offerings like Waitrose, M&S Food and Ocado. And with the latter two teaming up to boost M&S' online footprint, competition is at fever pitch.

That competition means Sainsbury's sales have been falling, despite a big investment in discounting prices - and while cost savings are helping to a degree, margins remain around a lowly 2.5%.

Sainsbury was hoping a merger with Asda would bring a solution. But since that's a non-starter, the group is still searching for a catalyst for change.

While a smaller part of the business, disappointing sales from the clothing business deserve a closer look. It's no secret clothing is a tough place to be, with big names struggling. By volume, Sainsbury is now the fifth biggest clothes retailer in the UK. If sales continue to decline the group could shift focus more towards beauty sales, which have been more flattering of late.

There are other bright spots too. Sainsbury's beat guidance to deliver cost savings of £220m last year. Synergies from the Argos integration came in ahead of schedule, debt is on the way down and the vegetarian and vegan offerings are flying off the shelves.

The prospective yield is now 5.4%, but it's worth remembering the dividend is linked to earnings. Sainsbury will need to increase profitability if the payout is to materially rise in the future.

All-in-all, "tough conditions" remain the phrase du jour. Sainsbury is doing what it can to boost performance, but investors will want to see more than fresh paint jobs on stores and meat free kebabs being deployed to keep the competition at bay.

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First quarter trading details

Grocery sales fell 0.5% in the period, despite growth in both online and convenience channels.

Prices have been reduced on more than 1,000 own-brand products. The premium Taste the Difference range continues to outperform the market, while vegan alternatives are selling well.

General Merchandise and Clothing declined 3.1% and 4.5% respectively, following challenging trading conditions and the impact of poor weather. Two new Argos sites were added to stores, and Argos Fast Track collections grew 20%.

Sainsbury will invest in 400 supermarkets over the year, and will add an enhanced beauty offer in a quarter of these, following a successful trial period.

The group continues to focus on cost savings and its goal of reducing net debt by £600m over the next three years. At the year-end, it stood at £1.6bn.

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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 disclosure for more information.