ii view: Sainsbury's grocery growth reassures

First-quarter trading quarter to 22 June

• Like-for-Like (LFL) grocery sales up 4.8%
• LFL General Merchandise (GM) sales down 4.3% 
• Argo sales down 6.2%
• Total LFL sales excluding fuel up 3%

Guidance:

• Continues to expect adjusted retail profit for the year ahead 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 are pleased with our market-beating grocery performance and the early progress we're making against our Next Level Sainsbury's plan. We've been winning from competitors every month for 15 months, as more and more people are choosing Sainsbury's for their big weekly shop.

"Our food business is going from strength to strength and I would like to thank all of my colleagues and our suppliers and farmers for the brilliant job they are doing every day to deliver for all our customers."

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ii round-up:

Retailer Sainsbury (J) (LSE:SBRY) operates around 597 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 now in the process of being sold to NatWest Group (LSE:NWG). 

For a round-up of this latest trading update announced on 2 July, please click here. 

ii view:

Started in 1869, Sainsbury's today employs around 148,000 people. Its acquisition of Argos in 2016 leaves it with the UK’s fourth most visited retail website. Under management’s ‘Next Level’ strategic push to March 2027, goals 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 discount retailers Aldi and Lidi. 

For investors, falling general merchandise sales, hindered by wet weather and the impact of high interest rates on consumer spending, cannot be forgotten. Competition across the sector remains intense, group net debt of £5.55 billion as of early March and including leases, compares to a stock market value of £6 billion, while a forecast dividend cover ratio or earnings-to-dividend payment of 1.6 times is below the three-year average of 1.8 times.   

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To the upside, grocery price increases below those by rivals helped drive food volumes higher this latest quarter. Cost savings of £1 billion are also being targeted. The previously announced sale of its core banking operations leaves management more focused on the performance of retail, while a price-to-net asset value of less than one compares to values of over five at Amazon, Dunelm and Greggs, suggesting the shares are not reasonable value.

For now, and despite continued risks, a consensus analyst fair value estimate above 300p per share and forecast dividend yield of more than 5% will continue to attract investor interest.

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