Sainsbury's dramatic share price recovery stalls

As competition from discounters persists, our head of markets analyses the supermarket’s latest report.

These are fairly uninspiring times for Sainsbury's (LSE:SBRY), although there are pockets of potential revealed in this third-quarter trading update.

The Argos acquisition continues to reap rewards for the supermarket group. While there was a slowdown in the toy and gaming part of the offering, Argos made a contribution which included a record Black Friday. 

Meanwhile, the cost savings associated with the deal, such as moving some Argos stores within existing supermarkets, will play into the Sainsbury’s strategy of using cost reduction as a major strategic block. 

In addition, clothing sales were up some 4.4% and, overall, online sales represented 20% of the total in the quarter. Quite apart from Argos, Sainsbury’s online offering has long been one of its strengths and, coupled with its mature convenience store presence, it offers a reasonably compelling choice for consumers. 

While the company continues to find its feet strategically, investors are being paid to wait in the form of a well-covered dividend yield of 4.9%.

Source: TradingView Past performance is not a guide to future performance

However, much remains to be done, as evidenced by some generally anaemic sales figures. Grocery sales were only marginally higher, General Merchandise dipped 3.9% and the total retail sales number was down by 0.7%. 

In terms of outlook, Sainsbury’s has crouched behind the inevitable retail mantra of a competitive and promotional market, alongside an uncertain consumer outlook. This is at a time when the distinctive offerings which would set it apart from its rivals remain unclear, and growth is therefore being ground out at a slow pace. 

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There are also the headwinds of the phasing of cost reductions and, as previously guided, higher marketing costs, particularly in the approach to the festive period. 

This update will do little to maintain some recent positive momentum, whereby the shares have risen by 10% over the last three months. Over the last year, however, shares remain down 13% despite that hike, and compare poorly to the wider FTSE 100 index which has added 10.4% in that period. 

Until such time as there is some obvious daylight between Sainsbury’s and its rivals, the current market consensus of the shares as a “hold” is likely to remain firmly in place, particularly with other opportunities beginning to emerge in the sector.