An upbeat statement from Britain's third largest grocer is in sharp contrast to the prevailing retail gloom. So are the shares a buy?
Just as Britain's stock market-quoted retailers were starting to run up the white flag, along comes the white knight.
Sainsbury's
(LSE: SBRY)
, the UK's third largest supermarket chain, has reported sales growth that actually beat analysts' forecasts.
And the management was surprisingly upbeat on the outlook.
The grocer said that revenue, excluding petrol, at stores open for over a year climbed a better than expected 3.7% in the 12 weeks to December 29. Top selling Christmas lines were the 'Basic' value products and the premium 'Taste the Difference' brand.
Total sales grew 5.9% over the period as the company opened an extra 12 supermarkets and eight convenience stores. Online sales jumped 40% as Sainsbury's offered home delivery on internet orders from nine more stores.
But these results were only achieved at a cost. The retailer slashed the price of DVDs by 20% in December and also offered discounts on Sony TVs. To match rival Tesco
(LSE: TSCO)
, Sainsbury's aims to increase non-food sales from 15% to 20%.
The grocer stocked about 1,000 organic products at its latest year end, of which more than 400 were own-brand, and plans to buy all of its tea from Fairtrade growers within three years.
Sainsbury's' share of the UK grocery market remained at 16.4% in the 12 weeks to 30 December, according to researcher Taylor Nelson Sofres, compared with Tesco's 31.5% and Asda's 16.7%.
But what really cheered investors was the confident statement.
The target set in March 2005 to raise sales by £2.5bn has been hit three months ahead of schedule, says the company, which expects to meet its profit targets for this year and insists there's 'no good reason' for the current retailing 'doom and gloom'.
And Sainsbury's is 'confident' of meeting a further aim of lifting revenue by £3.5bn by 2010 through extending 75 stores, expanding selling space to 19m square feet.
Where now for the undercooked grocer?
Long established shareholders in the company have had to endure a more than variable earnings record. And the dividend was halved as recently as 2005 to cut debt by £150m.
Sainsbury's shares fell sharply when the Qatari backed Delta Two fund shelved its bid last year, citing higher borrowing costs as making the proposal too expensive. Sainsbury's also received an offer from CVC Capital Partners that was withdrawn in April.
It's all added up to a remarkably poor long-term performance. Sainsbury's stock has actually undershot the FTA All-Share index by more than 70% over the last 15 years, during which time the food retail sector has beaten the market by almost 10%.
Indeed, at 387p, the shares stand at the same price as early 1992. Valued by the market at just over a third of turnover and with shareholders' funds representing around two thirds of its capitalisation, Sainsbury's shares now look solidly backed.
And on a price to earnings ratio (PER) of some 16.5 times next year's consensus net profits, with a prospective yield of 3.6%, the stock is looking reasonably valued, although on a slightly higher rating than Tesco.
Bottom line: Would I keep Sainsbury's at this price? As a defensive holding, probably yes. Would I buy at this price? No.
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