Conditions are still “challenging” for the big supermarkets, according to J Sainsbury (LSE: SBRY) boss Mike Coupe today. In a much-watched update he said Sainsbury’s like-for-like sales fell by 0.8% in Q1, excluding fuel. Total sales rose by 0.3%.
These figures are similar to the group’s results for last year, suggesting that Sainsbury is probably maintaining its market share. Indeed, the company said that like-for-like transaction numbers actually rose across its business during the quarter. Like-for-like sales are down because prices are falling, not volumes.
Sainsbury shares are flat after today’s update and still look attractive to me. The group trades on about 11.5 times forecast earnings, with a forecast yield of 4.3%. Debt remains modest and the stock trades at a 20% discount to its tangible book value of 313p.
The problem is that this isn’t really the business you’re buying: the £1.2bn acquisition of Argos will change the picture. It’s not yet clear to me how well this will work, so for now, I’m rating Sainsbury as a hold.
Sell after today’s results?
Sales rose by 26% to £599m at AO World (LSE: AO) last year, but the group’s operating loss increased from £2.2m to £10.6m. AO blamed its expanding European operations for the loss, and it’s true that AO World’s UK business is profitable.
However, a closer look at today’s figures shows that AO World’s UK operating margin fell from 2.7% to 2.3% last year. Low margins like this are typical in the consumer electronics and white goods sector, as competition is intense.
Despite this, companies in this sector can be good investments. Dixons Carphone and Darty have both double-bagged in recent years. The problem with AO World is that its valuation appears to be far too high. Whereas Dixons Carphone and Darty both trade with price-to-sales ratios of 0.5 or lower, AO World trades on a price-to-sales ratio of 1.2.
I’m willing to believe AO World can be a successful competitor in this sector, but I think the company’s shares are far too expensive. I rate AO as a sell.
Impressive profits from this retailer
It’s a different story at WH Smith (LSE: SMWH). Sales from the group’s travel outlets rose by 9% during the first quarter, including a 3% rise in like-for-like sales. Overall group sales rose by 2%, with like-for-like sales flat.
Although sales from the group’s high street stores fell by 4%, I’m not too concerned by this. WH Smith confirmed today that it’s managing its store estate to maximise profits and said that gross profit margins improved across the board.
The group’s travel business is continuing to expand at home and abroad. It’s benefitting from growing passenger numbers at airports and railway stations and I suspect profits could continue to rise for several more years.
WH Smith generates a lot of free cash flow, much of which is used to fund share buybacks. So far this year, 1.7m shares — worth £29m — have been repurchased. Over the last five years, the group has reduced its share count from 142m to 113.6m, boosting earnings per share.
While WH Smith’s forecast P/E of 18 and prospective yield of 2.5% make the shares more expensive than average, this is a quality business with a proven track record of high returns. Further gains may still be possible.
