ii view: Sainsbury's is battling hard on all fronts

Third-quarter trading update to 4 January

• Grocery sales up 4.1%
• Sainsbury general merchandise and clothing sales down 0.1%
• Argos sales down 1.4% 

Guidance:

• Continues to expect full-year adjusted retail profit of between £1.01 billion and £1.06 billion, or year-over-year growth of between 5% and 10% 

Chief executive Simon Roberts said

"We have won grocery market share for the fifth consecutive Christmas, with more customers choosing Sainsbury's for their big shop. Driven by our leading combination of quality, value and service, we have achieved seven consecutive quarters of volume performance ahead of the market and further accelerated our two-year volume growth.”

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ii round-up:

Retailer Sainsbury (J) (LSE:SBRY) operates around 595 supermarkets, 830 convenience stores and 660 Argos stores, most of which are now located within a Sainsbury's outlet.

Other group brands include Habitat, Tu and Nectar, with most of its Sainsbury’s Bank operations sold to NatWest Group (LSE:NWG). 

For a round-up of this latest trading update announced on 10 January, please click here. 

ii view:

Started in 1869, Sainsbury's today employs around 148,000 people. The FTSE 100 retailer acquired Argos in 2016, with other group brands including Habitat, Tu and customer loyalty reward scheme Nectar. Initiatives under management’s ‘Next Level’ strategic push to March 2027 include growing food volumes ahead of the market, cutting costs by £1 billion, and generating profit leverage from sales growth. Competitors include Tesco (LSE:TSCO), Marks & Spencer Group (LSE:MKS), Ocado Group (LSE:OCDO) and even food-on-the-go providers Greggs (LSE:GRG) and WH Smith (LSE:SMWH). 

For investors, falling quarterly Argos sales, hindered by pressured consumer spending given high borrowing costs, continue to impact performance. Sainsbury’s efforts to differentiate itself from rivals given intense price competition from discounters Aldi and Lidl, and its own premium ranges competing against those of Waitrose and Marks & Spencer, is ongoing. Tax increases announced in the Budget will pressure costs further, while a forecast dividend cover ratio of 1.7 times is less than the three-year average of 1.8 times.   

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More favourably, Argos sales down 1.4% year on years are at least flat versus the prior second quarter and an improvement on the fall of 7.7% in Q1. Comparatives are also expected to become easier during 2025. An Aldi price match scheme and Christmas sales growth for its ‘Taste the difference’ range point to success in becoming an ‘all-destinations’ retailer. Customer insight and profit growth from the Nectar loyalty scheme is being achieved, while a price-to-net asset value of under one compares to values of over four at fellow retailers Greggs, Next (LSE:NXT) and Amazon.com Inc (NASDAQ:AMZN), suggesting the shares are not expensive.

On balance, and despite ongoing risks, both a consensus analyst fair value estimate above 300p per share and a forecast dividend yield of around 5% offer reasons to remain positive about the long term. 

Positives: 

• Management improvement programme
• Attractive dividend payment (not guaranteed)

Negatives:

• Exposure to pressured consumer spending
• Intense sector competition

The average rating of stock market analysts:

Buy