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Sainsbury’s raises profits guidance courtesy of strong online and convenience store growth

10th January 2018 Print

As Sainsbury’s updates the market Helal Miah, investment research analyst at The Share Centre, explains what it means for investors:

“Sainsbury’s third quarter trading update has followed the theme of better results amongst the large supermarkets of late, with group sales during the period up by 1.2% excluding fuel. All the while, grocery sales were up by 2.3% driven forward by strong online and convenience store growth. Indeed, the group launched many new food lines for Christmas, many of which were in its premium ‘Taste the Difference’ range. Much like Morrison’s results yesterday, we are seeing the restructuring feeding through to better sales and some resilience against the German discounters.

“What should be particularly pleasing for investors is that the company’s General Merchandising and Clothing products did well to outperform the wider market where challenging conditions are being felt given the squeeze on consumer’s pockets.

“Moreover, the acquisition of Argos is proving to be successful, with same day Fast Track collections and deliveries becoming more popular amongst shoppers. 52 more Argos stores were opened within Sainsbury’s supermarkets, along with some mini Habitat stores. Cost synergies were always going to be a driving force for the acquisition, and here we are seeing greater cost savings than anticipated. Now, the group expect to deliver £160m of EBITDA synergies by March 2019 versus the previous £142m. Overall the group expects to deliver £185m of cost savings this year and are ahead of its three year target.

“This is a pleasing trading update from Sainsbury’s as it is demonstrating that most of the pain felt by the big supermarkets may now be behind them as a result of deep restructuring in recent years. Sainsbury’s and its large supermarket peers are putting up a better fight against Aldi and Lidl by growing sales. However, yesterday’s publication by Kantar showing market shares still paints a difficult picture as both the German retailers are still aggressively growing market share.

“We believe intense competition is here to stay and it is therefore unlikely that margins will improve to anything near past levels. In the short to medium term the company will be faced with the challenges of whether to pass on commodity price inflation onto its customers. For Sainsbury more specifically, the general merchandising environment is likely to feel the effects of falling real incomes more so than in food retailing which should provide further tough trading conditions for their Argos business and more volatile group sales figures.

“We still remain cautious on the food and general retail sector and therefore continue with our medium risk hold recommendation on Sainsbury’s for investors seeking a balanced return.”