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Why I would avoid this FTSE 100 stalwart

J Sainsbury (LSE:SBRY) is currently the third-largest supermarket in the UK and therefore occupies the lower middle position in the Premier League of UK supermarkets. 

Inception to current affairs

Founded in 1869 by John James Sainsbury, the company was the largest retailer of groceries by 1922. Currently, the company is split into three main divisions: Sainsburys Supermarkets Ltd, Sainsburys Bank, and Sainsburys Argos.

The acquisition of Home Retail Group, the parent company of Argos and Habitat, in 2016 for £1.4bn was seen as a major coup. But in April 2019, the Competitions and Markets Authority (CMA) blocked a merger between Sainsburys and Asda, citing the risk of price increases for consumers. 

The recent announcement that chief executive Mike Coupe will be stepping down after six years was met with mixed reactions. 

Maureen Hinton, retail research director at Global Data, doesn’t consider Coupe’s decision to stand down to be a shock. “After the Asda deal didn’t go through it needed a period of stability to get the company back on track. So it probably needs someone else to take over. You need a fresh eye. It’s very tough in retail generally, but there’s a big argument for saturation in the grocery sector.”

Performance and competition

If you look at the most recent, post-Christmas, trading update the supermarket’s like-for-like sales fell 0.7% in the 15 weeks to 4 January. While grocery sales actually increased by 0.4%, poor sales in the division that includes Argos weighed on the company’s overall performance. Clothing sales, however, grew by 5%, which Coupe said was helped by colder weather in the weeks before Christmas.

These results show a mixed picture for the retailer,” said Richard Lim, who runs analyst firm Retail Economics. “On the one hand, the food business held up relatively well in an extremely tough market,” he said. “On the other, Argos appears to have had a much tougher time, delivering an uncomfortable decline in sales over the festive period.”

What should I do now?

Looking at the bigger picture with respect to share price and general performance, the firm’s profit levels have been decreasing year on year for the past three years. As has the dividend per share. 

The supermarket wars will continue with each of the big four trying to get to the top. New cheaper competitors are opening up, like Aldi and Lidl, offering consumers an alternative. The recent news that the big four have all lost small amounts of market share will add to worries about these new additions to the UK market. As a silver lining, in a recent survey conducted by Which?, Sainsburys was voted the cheapest supermarket. 

However, I would steer clear of Sainsburys at the moment. A new chapter in its rich history is afoot, given there will be a new chief executive to stamp their mark as well as the long-term evolution towards online shopping.

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Jabran Khan has no position in any of the shares mentioned. 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.