After a number of years in the doldrums, the J Sainsbury (LSE: SBRY) share price roared back in 2023, rising 25%. With analysts at Goldman Sachs recently turning bullish on the stock, I am beginning to wonder if I should add some to my Stocks and Shares ISA.
Mixed Christmas results
Today (10 January) the company reported its sales figures for the crucial 12-week trading period leading up to Christmas.
It reported strong momentum in groceries, with sales up 8.6% compared to last Christmas. It witnessed a record number of sales of pigs in blankets, mince pies, and sparkling wine. Its new Nectar Prices reward scheme was also a major contributor to top-line growth.
General merchandise and clothing did not perform anywhere near as well, though. Argos’ figures came in 3.9% lower and Christmas clothing fell 6%.
Despite a strong grocery performance, it held underlying profit guidance at between £670m and £700m for 2023/24.
Nectar card
One of the major innovations among the large grocers in 2023, was the introduction of a revamped club member card.
The catalyst for this has been the cost-of-living crisis. At Sainsbury’s, Nectar participation reached 90% on an £80 weekly shop. The company claims that this saved customers an average of £16 during Christmas week.
There is no doubt that the launching of Nectar Prices has been a major catalyst in the turnaround of its fortunes. There have been over 3m new customers signing up to Digital Nectar since its launch in April.
However, I do have some concerns. As its competitors, particularly Tesco, step up with their own versions, I remain to be convinced if it will result in a true differentiator over the longer term.
Even more telling is that the regulator, the Competition and Markets Authority, is now looking into the entire market around loyalty schemes. It believes they could be leading to less competition.
Is it buy?
When I research a potential investment opportunity, my default is always to take a bullish stance.
The stock clearly has momentum on its side at the moment. But with its share price down over 4% in early trading, my concern is that sentiment could be about to change again.
When I look at an ultra-long-term chart of its share price, all I see is a series of ups and downs. That makes timing any purchase critical.
Its no great revelation to say that competition in the grocery business is cut-throat. Since their introduction in the UK, Aldi and Lidl have transformed the grocery market. Cost-of-living pressures have added to the alure of these brands among consumers.
What I have learnt over the past couple of years is that inflationary forces have been good for grocery retailers. It has enabled them to protect margins by raising prices, even as volumes declined.
Core inflation may have come down, but food inflation remains elevated and is likely to remain so for some time, in my opinion. But it isn’t all good for Sainsbury’s. Successive wage increases to attract staff is likely to hurt profits.
The major allure of the stock is its 4% dividend yield. But for me, that is not enough to attract my attention.
