The UK stock market has performed well since the Covid-19 sell-off. Investor sentiment has been positive due to the Brexit deal and the successful vaccination drive. The FTSE 100 index has risen about 25% in the past year.
Today, I would like to review Sainsbury’s (LSE: SBRY) to see if it’s a potential buy.
Fundamentals
The UK food and grocery market demand has been strong. According to researcher Kantar, the over-65s that have been vaccinated have increased their trips to supermarkets. When we look into the February 2021 shopping figures, the UK’s ‘big four’ supermarkets have done well. Looking specifically at Sainsbury’s, sales increased by 12% to hold its market share of 15.6%.
In the interim results, total retail sales grew by 7.1%. The company’s focus on online sales is showing good results. Digital sales were up 117% to £5.8bn: these were approximately 40% of total sales.
The retail free cash flow was positive, which is another reason for me to like this FTSE 100 stock. The management expects full-year profits to be at least 5% higher than the previous year.
Sainsbury’s is restructuring its business. It is closing Argos stores in many cities and plans to accommodate its business through online channels or in existing Sainsbury’s stores. It also plans to reduce the staff and office space in a bid to save costs.
The multi-brand and multi-channel formats have helped to sustain the competitive supermarket industry. The store’s layout is wide and it makes shopping in Sainsbury’s very easy. The decision to buy Argos is also a good long-term plan, I believe. Argos has a very good brand value, which compliments very well with Sainsbury’s. The delivery or click-and-collect service is very reliable. It has a growing loyal customer base due to the excellent service.
Risks to consider in this FTSE 100 stock
Sainsbury’s has been able to differentiate in the past as a premium offering. However, nowadays consumers are looking for value. As such, it is losing market share to discounters like Aldi and Lidl. The company has recently started an ‘Aldi price match’, which is a good strategy. However, the company’s profitability will be affected.
The company has benefitted from increased grocery and food usage during the Covid-19 pandemic. There has been a clear shift from the consumer’s spending on pubs and restaurants to supermarkets. However, this demand might slow down when people start going back to offices and outdoors.
Also, the restructuring of the business will have near-term costs. A lot of Argos stores are being closed. Sainsbury’s is also planning to reduce office space. It is uncertain today how consumers might adjust to this new format.
Conclusion
Sainsbury’s is a fundamentally strong company. The shares are currently trading at a forward price-to-earnings ratio of 12. I believe in the current environment the valuation is cheap. However, I am not a buyer of this FTSE 100 stock today. I will keep the stock on my watchlist since I am not yet convinced that it will overcome the competition in the supermarket sector.
