Sainsbury’s [SBRY] has failed to recover its share price after falling off a cliff this February, after its bid to merge with rival Asda – owned by US retail conglomerate Walmart [WMT] – was ruled out by competition watchdogs.
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On 20 February Sainsbury’s share price fell by 18.5%, from 276.65p to 225.34p. By the end of the month it had fallen a further 2.3% to 220.05p and on 15 August, the FTSE 100 shares fell to a new low of 177.10p.
This prompted some analysts to believe that Sainsbury’s share price has bottomed out, and can now only return to growth. Early signs ahead of the company’s earnings results are good, the share price has gained by 16.2% from 15 August.
What can traders learn from past earnings results?
Sainsbury’s second quarter earnings results, reported on 25 September, focused on a new strategy for growth – the first announced since its failed bid to merge with Asda.
The company said it would cut costs by around £500m over five years. After an extensive regional store review, it decided to close 10-15 struggling branches and replace them with 10 new supermarkets.
Amount Sainsbury's want to cut costs by over 5 years
Sainsbury’s also said that it would create 80 new stores for its subsidiary Argos within its supermarkets, while closing a separate 60-70 Argos sites. It will open an additional 110 new convenience stores after closing 30-40.
The UK retailer forecasts a net operating profit benefit of £20m a year as a result of these actions.
Elsewhere, Sainsbury’s also said that it would stop new mortgage sales immediately.
Interactive Investor’s Richard Hunter told ShareCast that these moves should maintain a healthy dividend for the company. “The current yield of 5.2% has been a rare chink of light in recent times for investors,” he told the publisher in September.
Second quarter total retail sales rose 0.1% excluding fuel in Q2, with like-for-like sales down 0.2% excluding fuel. Grocery sales increased by 0.6%, general merchandise declined 2%, while clothing sales increased by 3.3.%.
What to expect in Sainsbury’s interim results?
Despite last quarter’s culling of stores, market research firm Kantar says that Sainsbury’s was the only one of the UK’s major supermarket chains – Asda, Morrisons [MRW] and Tesco [TSCO] – to achieve growth during the 12 weeks ending 6 October.
Sainsbury’s increased sales by 0.6%, the fastest rate achieved since October 2018, according to Kantar. This could indicate a prospective boost to its upcoming earnings results and offer an optimistic outlook for the company.
However, the supermarket chain has warned investors that it expects first-half underlying profit to fall by around £50m year-on-year. It blames cost savings, unseasonal weather and higher marketing costs for the decline.
As it stands its full-year guidance is unchanged, and the company expects a strong performance in the second-half of the financial year.
|PE ratio (TTM)||23.17|
|Quarterly Revenue Growth (YoY)||0.50%|
Sainsbury's share price vitals, Yahoo Finance, 06 November 2019
Despite Sainsbury’s new offering, Hunter says: “In terms of market consensus, there is still considered to be better value elsewhere in the sector, with Tesco comfortably being the preferred play, although the general view of Sainsbury’s has at least recently ticked up to a hold from its previous sell rating.”
Writing on Motley Fool, Graham Chester says that having witnessed consensus forecasts for full-year profits revised downwards over the past few months, he would recommend avoiding Sainsbury’s shares at this stage.
On the same publication, Roland Head says: “In my view, the shares are priced about right at current levels. Trading on 10.5 times forecast earnings with a 5% dividend yield, I’d rate the shares as a hold, at best. I think there’s still a significant risk of further disappointment, so I would prefer to wait for signs of progress before considering a buy.”
Meanwhile, Investomania’s Robert Stephens has a more optimistic outlook. “Mid-tier operators such as Sainsbury’s may be able to compete on service levels and the quality of their own-label brands. This could mean that the stock has an improving outlook – particularly as it seeks to cut debt, close unprofitable stores and make cost cuts.
“Mid-tier operators such as Sainsbury’s may be able to compete on service levels and the quality of their own-label brands. This could mean that the stock has an improving outlook – particularly as it seeks to cut debt, close unprofitable stores and make cost cuts” - Investomania analyst Robert Stephens
“Since I’m generally upbeat about UK retailers, and the wider UK economy, over the long run, I feel that Sainsbury’s PE ratio of 10 could be appealing compared to some of its FTSE 100 peers,” Stephens added.