ii view: high yielder Sainsbury's has right strategy

This FTSE 100 retailer fell by 21% in 2022 but is up around 23% so far this year. We assess prospects. 

First-quarter trading update to 24 June

• Like-for-like sales excluding fuel up 9.8%
• Grocery sales up 11%
• General merchandise sales up 4%

Guidance:

• Expects adjusted full-year pre-tax profit of between £640 to £700 million and compared to £690 million last year

Chief executive Simon Roberts said

“Food inflation is starting to fall and we are fully committed to passing on savings to our customers. Since March, we have invested over £60 million in lowering prices, leading on price cuts across more than 120 essentials.

“Customers can see that prices at Sainsbury's have improved and this combination of great value and some good weather in recent weeks means we have grown our food volumes and market share. Customers are choosing us when they want to celebrate and we grew ahead of the market over Easter, the Coronation and the bank holidays.”

• Invest with ii: Share Dealing with ii | Top UK Shares| Cashback Offers

ii round-up:

Retailer Sainsbury (J) (LSE:SBRY) operates more than 600 supermarkets and 800 convenience stores across the UK.

Its brands include Argos following its takeover in 2016, Habitat, Tu and Nectar, along with Sainsbury’s Bank.

For a round-up of this latest trading update announced on 4 July, please click here. 

ii view:

Started in 1869, Sainsbury's today employs over 170,000 people. A constituent of the FTSE 100 index with a stock market value of around £6.3 billion, it competes against rival Tesco (LSE:TSCO) valued at close to £18 billion, delivery company Ocado Group (LSE:OCDO) worth £4.5 billion, and even general merchandise retailer B&M European Value Retail SA (LSE:BME) at £4.3 billion. Retailing generates most of its sales, with financial services via Sainsbury’s Bank accounting for under 2% of annual revenues.  

For investors, the difficult backdrop for its customers including rising mortgage and rental costs cannot be forgotten. Costs for businesses generally remain elevated. Tougher sales comparatives now lie ahead given the prior influence of the pandemic, competition across the sector remains highly intense, while current full-year adjusted profit guidance of between £640 million and £700 million compares to last year’s £690 million.  

• Sector Screener: a potent mix of growth potential and defensive appeal
• Richard Beddard: my savage derating of this popular FTSE 100 share
• ii view: M&S sparks investor optimism but is it justified?

On the upside, its market share performance is outpacing rivals, according to management, as it continues to focus on its value offering. The launch of Nectar prices should help increase customer loyalty, Argos remains the third most visited website in the UK, while a price-to-net asset value of under one times compares to values of over five at Amazon (NASDAQ:AMZN), B&M and Greggs (LSE:GRG), suggesting the shares are not obviously expensive. 

On balance, and while some caution is sensible, a defensive food offering and a forecast dividend yield of over 4.5% should keep income investors happy. 

Positives: 

• A cost saving programme ongoing
• Attractive dividend payment (not guaranteed)

Negatives:

• Elevated costs
• Intense sector competition

The average rating of stock market analysts:

Sell