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Is Sainsbury’s share price headed downward despite online growth?

Sainsbury’s [SBRY] share price was down 1.6% at close Wednesday (8 January) its third-quarter trading statement showed that total retail sales over the 15 weeks to 4 January fell 0.7% year-on-year – steeper than a previous consensus estimate of a 0.3% decline. Meanwhile, like-for-like sales declined by the same amount. This happened even despite the fact that Sainsbury’s total online sales grew 5%, while the company’s online groceries grew 7.3%  and reported record order numbers over Christmas.

While clothing and grocery sales grew by 4.4% and 0.4% respectively, the general merchandise division – which includes Argos – was key to the decline with sales falling by 3.9%.; the dip was despite Argos having delivered “its biggest ever digital channel trading day on Black Friday”.

 

 

 

 

A closer look at Q3

According to Sainsbury’s CEO Mike Coupe during the “key Christmas week” nearly 32 million customers shopped with both Sainsbury’s and Argos. “Customers do have more money in their pockets year-on-year, but they are choosing to be very careful in the way they spend that,” he told CityAM, while previously noting that the toy and gaming markets have seen a year-on-year decline.

“Customers do have more money in their pockets year-on-year, but they are choosing to be very careful in the way they spend that” - Sainsbury’s CEO Mike Coupe

An explanation for this is that shoppers may have spent more during November but spent less during the Christmas period, suggests Richard Lim, CEO of research firm Retail Economics. While Sainsbury’s food business did relatively well “Argos appears to have had a much tougher time delivering an uncomfortable decline in sales over the festive period,” Lim told CityAM.

Although such events do not excuse the poor performance of the general merchandise sector the burgeoning growth of Sainsbury’s online offering looks promising to some. After all, over 20% of Sainsbury’s business was administered online over the period, while total online sales grew by 5% year-on-year.

 

A tough first half

Industry research from Kantar suggested that in sales terms Sainsbury’s performed the least poorly in the Christmas out of the big four supermarkets  – Asda, Morrisons, Sainsbury’s and Tesco. Shore Capital analyst Clive Black said in a client note despite the difficult market environment the supermarket is “toughing it out more effectively” – making things a little more difficult for competitors like Tesco. So, why are shares dropping?

Investors may be particularly sensitive since Sainsbury’s planned merger with Asda fell through last year after the UK Competition and Markets Authority blocked the proposal in April. Sainsbury’s share price dropped 26% from an early January 2019 high when the merger was disallowed. It has since recovered modestly by 10%.

Additionally, the share price has been beaten down by less-than-desirable interim results announced in November, which saw pre-tax profit fall by more than 90% to £9m for the 28 weeks to 21 September.

 

Market Cap$5bn
PE ratio (TTM)124.61
EPS (TTM)1.80
Quarterly Revenue Growth (YoY)-0.20%

Sainsbury's share price vitals, Yahoo Finance, 09 January 2020

 

Outlook

Since reaching all-time lows around 174p in mid-August, its share price has gained by around 30% up to 8 January. Despite the recent drop, Sainsbury’s could retest the 240p area if investors are as bullish as they have been since mid-August, according to CMC Markets analyst David Madden.

Optimism around the retailer’s online push and a revamp of its stores includes plans to close down 60-70 failing Argos sites, and the opening of 80 new ones; that’s alongside the closing of 40 old Sainsbury’s convenience stores for 110 new ones.

“Sainsbury’s, in essence, has modest ongoing earnings-per-share growth aspirations, ambitions to reduce net debt and so to sustain an ongoing attractive income stream funded from free cash flow,” Shore Capital said in a note, according to CityAM.

“Sainsbury’s, in essence, has modest ongoing earnings-per-share growth aspirations, ambitions to reduce net debt and so to sustain an ongoing attractive income stream funded from free cash flow” - Shore Capital

The consensus rating among 14 analysts polled by MarketBeat puts the stock at hold, while the stock has been given a consensus twelve-month price target of 227.36p.

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