Shares in Sainsbury (LSE: SBRY) climbed 1% in early trading as the market digested the latest figures from the UK’s second biggest supermarket.
Over the 16 weeks to the start of July, retail sales rose 2.7%, excluding fuel and the impact of selling its pharmacy business. On a like-for-like basis, sales were up 2.3%.
The 3% rise in grocery sales — a big improvement on the 0.3% achieved in both Q3 and Q4 of the last financial year — will be particularly pleasing to existing shareholders, as will the 8% and 10% respective increases in online and convenience store sales.
Away from food, clothing rose an encouraging 7.2% (up from 5.2% in Q4 2016). Thanks to the acquisition of Argos, the company also outperformed the market when it came to general merchandise, even if growth of 1% was less than in the previous quarter (1.5% in Q4). Online sales rose 10% with the company’s Fast Track delivery service – promising to deliver orders on the same day – proving popular thanks to the recent hot weather and customers’ desire to get their paddling pools and electric fans as soon as possible.
On an operational level, the Mike Coupe-led business reflected on its ongoing efforts to differentiate itself from the competition by enhancing its food ranges and opening more Argos Digital stores in its supermarkets. There are also plans to continue growing its banking division and achieve £145m of cost savings over the current financial year.
Time to buy?
Over the last 12 months, shares in Sainsbury have climbed 13%. While hardly exceptional in a rising market, that’s still not bad for a lumbering £5.5bn cap.
Even so, I’m still to be convinced that this momentum can continue. Indeed, if anything, I would give serious consideration to selling any shares I had in the company sooner rather than later. Let me explain.
For one, the rising cost of importing food as a result of sterling’s weakness is likely to continue hitting the firm’s bottom line. While competitors will also be hit, investors need to consider whether their capital could be put to better use in companies that are more geographically diversified and/or export-focused.
Secondly, Sainsbury’s much-rumoured offer of somewhere around £130m for the Nisa convenience chain — while not necessarily a bad move — does highlight the arms race currently playing out in the grocery sector. Regardless of how well a company is run, the need to keep spending to simply maintain pace with rivals is not usually indicative of a rewarding investment.
Third, the rather muted reaction to today’s positive numbers is surely a sign that the market is still reeling from Amazon’s recent announcement that it would be entering the space through the $13.7bn purchase of Whole Foods. While the former’s presence in the UK market is negligible right now, I wouldn’t bet against this growing rapidly over the next few years. An offer to buy Ocado in the near future could really spice things up. Expect significant downward pressure on Sainsbury’s share price if this actually happens.
Overall, Sainsbury’s current price-to-earnings (P/E) ratio of 13 might look reasonable but I still consider it steep for a company that is simply being compelled to do whatever it can to protect its market share from other listed grocers, German discounters and online disruptors. A 4% dividend yield may be tempting but, for me, it might be time to bail on Sainsbury.
