It is some years since I swept the big supermarkets out of my portfolio but maybe I was a little too rash to dismiss the entire sector.
Both Tesco and Morrisons have staged successful fight-backs in recent years, as has J Sainsbury(LSE: SBRY), which issued a half-year report today. This update has received a cool reception, the stock dipping 0.5% in response, but it looks tasty enough to me.
Operational highlights include underlying profit growth of £51m driven by synergies from its hook-up with Argos, which were delivered ahead of schedule. The hot summer boosted food and general merchandise sales, with grocery sales rising 1.2% and general merchandise sales up 1.5%, although the real action was elsewhere. Online groceries grew nearly 7% and convenience grew more than 4%.
Sainsbury’s also reported continued pressure on general merchandise margins, while clothing sales fell 1%, which it pinned on “changes in promotional phasing”.
Fresh and fruity
Overall Sainsbury’s posted a 3.5% rise in group sales to £16.9bn and 20% underlying profit before tax growth to £302m. Profit after tax fell 13% to £144m, which reflected “further non-underlying charges relating to restructuring our store management teams, Argos integration, Sainsbury’s Bank transition and the proposed combination with Asda”.
Group CEO Mike Coupe is giving the £7bn FTSE 100 company a complete overhaul, transforming the way runs its stores and introducing a new, leaner management structure, but the real point of interest today is the integration of Argos – and what happens with Asda.
Installing Argos areas in its stores appears to be working well, with Sainsbury’s hitting its £160m savings target nine months early. It is on course to save £200m by year-end, and “at least” £500m over three years.
There is little new to say about the Asda move, currently under review by the Competition & Mergers Authority (CMA), but the apparently successful integration of Argos is a sign that Coupe’s team can manage this far bigger task. We’ll know more when the CMA reports in the spring.
Coupe de grâce
It has been a good year for the Sainsbury’s share price, which is up 38% in 12 months. It now trades on a forward valuation of 15.6 times earnings, so is no longer a value buy. The forecast yield is a solid 3.4%, with cover of 1.9 and this could rise. Forecast operating margins are a wafer thin 2.1%, although up from 1.8%. Aldi and Lidl continue to squeeze margins.
City forecasters reckon Sainsbury’s will finally post EPS growth in the year to 31 March 2019, of a modest 1% followed by 4% the year after. These are tough times for all retailers, but at least wages are finally rising faster than inflation. Long may that continue.
Sainsbury’s warned of the uncertain consumer outlook as it heads into its key trading period, with the grocery, general merchandise and clothing markets “highly competitive and very promotional”. However, it remains on track to deliver current market consensus for underlying profits before tax of £634m this year.
Today, Sainsbury’s is all about Argos. Tomorrow, Asda. I just wish it looked like posting meaningful grocery sales growth as well, but it could still beat the FTSE 100.
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harveyj 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.