Sainsbury (J) plc (SBRY) Ordinary 28,4/7p
HL comment (8 January 2020)
Total retail sales excluding fuel declined 0.7% in the third quarter. That reflects weaker trading in General Merchandise, and a fall of 0.7% in group like-for-like business.
The shares fell 1.2% following the announcement.
Conditions remain tough for Sainsbury, and progress is still proving sluggish.
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.
Discounted prices are helping grocery sales tick upwards, but growth is hardly stellar. Relying on promotions too heavily isn't a good look for the long-term either. If volumes falter it's a bad combination for margins, which are already a little thin. Cost savings are helping, but increased marketing spending and previously softer sales meant margins slipped under 3% last time they were reported.
That raises the question of how sales and profits are going to be boosted longer-term. The integration of Argos is still expected to bring in £500m worth of synergies over five years, but that can't go on forever. Ideally sales from Argos would be helping to offset the sluggish performance in groceries, but at the moment this isn't the case. Argos is more vulnerable to shifts in discretionary spending than food too. That means the recent definitive election result could provide a tailwind if purse strings start to loosen, but for now there are no signs of a "Boris Bounce" in the division.
Credit where it's due, clothing has improved a lot since last year - no mean feat in today's crowded fashion market. But this is far from the headline story, it's far more important we see performance moving forward in the food aisles over the clothing racks.
For now there's a prospective yield of 4.6%, which could mean investors are paid to wait and see if (and how) Sainsbury notches performance up a gear. As ever though, no dividends are guaranteed. The shares change hands for 11.7 times expected earnings, broadly in line with the ten year average.
All-in-all, "tough conditions" remains the phrase du jour. Sainsbury is doing what it can to boost performance, but there's still plenty of work to do.
Third quarter trading details
Grocery sales rose 0.4%, which is the same growth rate as this time last year. Online, grocery sales were up 7.3%, with record order numbers throughout the Christmas period. The group said it's the only traditional retailer to grow sales in value own label products over the period.
Clothing sales saw a big improvement, with sales up 4.4%, compared to 3.3% in the preceding quarter, and a decline of 0.2% last year. Looking only at full-price items, there was an 8% increase, with Womenswear proving particularly popular.
Within General Merchandise sales fell 3.9%. Argos outperformed the market in consumer electronics, but trading in gaming and toys was more challenging. Argos click and collect grew almost 16%, and 10 Argos stores were opened - the total now stands at 298.
The group's on track to deliver improvements to 450 supermarkets and 200 convenience stores by mid-March, and 6 new convenience stores were opened this quarter.
Sainsbury said retail markets remain very competitive and the consumer outlook is still uncertain.
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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