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Why I think Sainsbury’s will keep being a loser in 2020

Retail is a tough industry to be in right now. Even the supermarkets that people use frequently aren’t immune, it seems, to the wider slow demise of the high street and the growing strength of discounters.

The latest data from Kantar, shows that for the grocery market, year-on-year supermarket sales grew by 1% over the 12 weeks, up to mid-November. The increase is slightly behind the equivalent rate last month, against a backdrop of political uncertainty and a persistently wet autumn.

After a positive month last time around, J Sainsbury (LSE: SBRY) sales were down by 0.2% in the past 12 weeks, with its market share falling back slightly to 15.6%.

The supermarket’s challenge

Sainsbury’s is the second-largest UK grocer behind Tesco, which overshadows it when it comes to market share. The latter has a commanding 27% of the market and has made major strategic steps forward in recent years, including acquiring the wholesaler Booker for £3.7bn and completing a strategic alliance with French group Carrefour to enhance buying power and drive down prices.

This progress that Tesco has achieved – even accounting for the fact it came after a period of turmoil – contrasts sharply with the perception of the leadership at Sainsbury’s, which failed in its major mission to acquire Asda. That £7.3bn deal, which would have made Sainsbury’s the biggest UK grocer, was blocked by the UK competition regulator.

Having failed to convince sceptics of the benefits of the deal, Sainsbury’s now looks vulnerable. Aldi and Lidl are taking market share, it’s trying to cut debt rapidly and the acquisition of Argos is not arresting a slump in profits. This begs the question: was the Argos buy a mistake and can Sainsbury’s really become an omnichannel retailer? The evidence would suggest it’s struggling.

The latest results

Earlier this month, the supermarket reported a 15% fall in interim profits, which it blamed primarily on the phasing of cost savings, higher marketing costs and tough weather comparatives. The chief executive also apportioned blame to Brexit, although the extent to which people stop buying food because of an election or leaving the EU is hard to quantify.

These results show the group has struggled in recent times. It follows on from first-quarter results that also showed sales falling, so it’s far from being a one-off. In the 16 weeks to June 29, Sainsbury’s saw like-for-like sales down 1.6% excluding fuel. Falls came across grocery, general merchandise and clothing, indicating no part of the business is doing well, although it has to be said that clothing fell in Q1 but rose in Q2.

On the face of it according to the low P/E and the high dividend yield, the share price looks cheap. Though given the steep fall in the shares during 2019, I expect Sainsbury’s could continue to lose investors money throughout the next 12 months and beyond.

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Andy Ross has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.