Sainsbury’s tipped as a ‘buy’ despite weaker sales

13th January 2016

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As Sainsbury’s reports a Q3 trading update Helal Miah, Investment Research Analyst at The Share Centre, explains what it means for investors…

This morning, supermarket Sainsbury’s reported that Q3 like-for-like sales excluding fuel had declined by 0.4%, while total sales excluding fuel rose 0.8%. These numbers were slightly ahead of expectations. The fall in sales could be credited to the company’s decision to reduce levels of promotional activity over the period, combined with the fact it also reduced the number of multi-buys in favour of lower regular prices. Investors should appreciate that the group expects its second half results to be better than the first half based on the performance of its like-for-like sales results in Q3. However, it does expect food deflation and pricing to remain a challenge.

The outlook continues to look challenging for UK food and drug retailers as online retailers continue to test the big four, demonstrated by the likes of Amazon planning on launching a UK grocery service in the UK. However, interested investors should acknowledge that according to the latest research from Kantar Worldpanel, Sainsbury’s was the best performer of the big four over the festive period. This was due to the group attracting an additional 114,000 shoppers and its premium ‘Taste the Difference’ brand recording its best ever Christmas. Despite this news, the data also confirmed that discounters Aldi and Lidl continue to steal market share.

After last week’s news that Sainsbury had been targeting the acquisition of Home Retail, and still indicating they are interest in that acquisition, the stage could be set in retail in general for a year of consolidation in 2016.

Sainsbury has a solid balance sheet, which ensures it is fit to meet the challenges it is being presented with. However, to maintain that strength, dividend income has fallen as it targets dividend cover of 2 times its underlying earnings. Subsequently, we recommend Sainsbury’s as a ‘buy’ for contrarian investors only, as the company leverages its range of shopping channels, diversifies its products and services and focuses on flexibility and convenience. Investors should note that this is where it has advantages over the likes of Aldi and Lidl.

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