Does Today’s Update From J Sainsbury plc Make It A ‘Buy’?

Today’s update from J Sainsbury (LSE: SBRY) is encouraging and shows that the company is moving in the right direction. While like-for-like (LFL) sales fell by 0.4% in the 15 weeks to 9 January, total sales were up by 0.8% (both figures exclude fuel). Looking ahead, Sainsbury’s expects LFL sales to improve in the second half of the year versus the first half.

The increase in total sales for the quarter was partly due to reduced levels of vouchering and promotional participation versus last year, with Sainsbury’s focusing instead on lower regular prices and fewer multi-buys. This is part of a new pricing strategy that will see Sainsbury’s attempt to simplify its customer offering. With consumers enjoying real-terms wage growth, there’s the potential for improved performance as customers gradually become focused on less than just price over the medium term.

Total sales were also aided by a strong performance from online, with grocery sales up by 10% and orders rising by 15% versus the same period last year. Furthermore, general merchandise achieved sales growth of 5% in the quarter, with clothing posting an impressive increase in revenue of 6%, despite the unseasonably warm weather that hurt other clothing retailers. And with the company’s banking division reporting an 11% volume growth in loans, the performance of Sainsbury’s non-food divisions continues to improve.

And the future?

Looking ahead, Sainsbury’s expects food deflation and pressures on pricing to equate to a challenging medium-term outlook. Therefore, the company’s performance may continue to improve, but most likely at a rather modest rate. This is evidenced by forecasts for profitability in the next financial year, with Sainsbury’s due to report a fall in earnings of 2%.

Despite this, Sainsbury’s appears to be an appealing purchase at the present time. That’s at least partly because today’s update shows real improvement from previous years when the company’s performance showed little sign of improvement and it was engaged in a fierce price war with rivals. Although investment in pricing is set to continue, an improving UK economy means that this is likely to be on a smaller scale and this should aid margins over the medium-to-long term.

With Sainsbury’s trading on a price-to-earnings (P/E) ratio of 11.6, there’s plenty of scope for an upward rerating. This could begin to take place during the course of 2016 since, as mentioned, the company expects an improvement in sales for the second half over the first. As such, investor sentiment could begin to improve and with Sainsbury’s offering a yield of 4.2%, its total return could be highly appealing.

Certainly, there’s still a very long way to go before Sainsbury’s is firing on all cylinders, but today’s update shows that it has the right strategy and is enjoying improving trading conditions. Therefore, buying it now seems to be the right move for long-term investors.

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Peter Stephens owns shares of Sainsbury (J). The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.