The results are still better than expected
Caution remains as Sainsbury’s report slow growth
- Sainsbury’s experience sales growth, particularly online with a 7.3% increase but still lags behind its peers
- The integration of Argos into Sainsbury stores however, has been received positively as the group enjoys a 15% sales growth in its second year
- We continue to recommend Sainsbury as a ‘Hold’ for investors seeking a balanced portfolio and willing to accept a medium level of risk
After recording a fairly poor 0.9% like-for-like sales growth at the previous quarter not much was expected for the quarter just gone, with analysts anticipating 0.1% growth. Reporting a 0.2% growth this morning was better than expected, setting a positive tone to the share price at the market open.
All divisions of the group experienced positive performances; grocery sales were up by 0.5% whilst online groceries and convenience sales were up by 7.3% and 3.6% respectively.
Meanwhile the integration of Argos stores into larger supermarket stores continues to reap rewards. Argos shops that have already opened in Sainsbury’s stores have on average experienced 15% sales growth in its second year and there are many more store openings planned for the current year.
Good grocery volumes and sales have been led by price reductions on a number of product ranges including fresh meat, fruit and vegetables. The transforming and restructuring continues and it remains on track for a further £200m of cost savings during the current financial year. Management have also confirmed that it has secured a £3.5bn financing package on the proposed combination with Asda which will give the group much more market share and should in theory reduce costs significantly.
However, despite the fact that these were good numbers compared to expectations, Sainsbury’s has in recent quarters been reporting the weakest figures amongst its peers. This could partly be explained by the fact that its sales did not plunge like its peers who have had to make even more structural changes. However, according to market research firm Kantar, Sainsbury continues to lose market share at a greater rate than its peers.
The proposed with merger with Asda will hopefully improve the market share prospects for the group along with deep cost savings and much improved buying power which will become all the more important as Tesco arranges supplier agreements in cohort with Carrefour. These manoeuvres still demonstrate to us that the sector remains super-competitive with cost cuts the focus to keep shoppers coming. This can only mean that margins will remain low for years to come especially as Aldi and Lidl are here to stay.
We remain cautious on the retail sector in general given the challenging environment and therefore we can at best recommend a ‘hold’ rating for investors willing to accept a medium level of risk.
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