ii view: income play Sainsbury's grows market share at Argos

Expanding sales, cutting costs, and an attractive forecast dividend yield. Buy, sell, or hold? 

Third-quarter trading update to 7 January

• Grocery sales up 5.6%
• General merchandise sales up 4.6%
• Now expects full-year profit at the upper end of previous £630-£690 million estimate

Chief executive Simon Roberts said:

"We delivered the best possible Christmas for customers as millions of households managed their budgets differently, hosting larger gatherings again and treating themselves at home. Customers shopped early, buying Christmas treats and fizz more than once and looked for deals, taking advantage of Black Friday and other seasonal offers. Argos offered great value and quality and, as train and postal strikes disrupted the country, customers appreciated its reliability and convenience.”

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ii round-up:

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

Following its acquisition back in 2016, its brands also now include Argos with around 1,000 outlets, many of which are now located within Sainsbury's stores. 

For a round-up of this latest trading update announced on 11 January, please click here. 

ii view:

Started back in 1869, Sainsbury's is today a constituent of the FTSE 100 index with a stock market value in the region of £5.7 billion. That compares to Tesco (LSE:TSCO) at around £18 billion, delivery company Ocado Group (LSE:OCDO) at just over £6 billion and general merchandiser B&M European Value Retail SA (LSE:BME) at £4.3 billion. Employing over 170,000 people, other brands include Habitat, Tu, Nectar and Sainsbury’s Bank. 

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For investors, the tough backdrop for consumers, including rising interest rates and a cost-of-living crisis, cannot be ignored. Competition remains intense, with rivals Morrisons and ASDA both now under private equity ownership and discounters Aldi and Lidi still expanding, while Sainsbury’s guidance for annual profit of up to £690 million remains below last year’s £730 million.

More favourably, its Argos business is making market share gains, with its website the third most visited retail site in the UK, according to Sainsbury's itself. Cost savings continue to be pursued, cash generation is aiding debt reduction while a price to net asset value of under one compares to values of over five at Amazon (NASDAQ:AMZN), B&M European and Greggs (LSE:GRG), suggesting the shares are not obviously expensive. 

For now, and while room for caution persists, a defensive food offering and a forecast dividend yield of over 5% should at least keep income investors happy.

Positives: 

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

Negatives:

• Rising costs
• Intense sector competition

The average rating of stock market analysts:

Hold