Sainsbury’s shares surge, then fade

<p>Sainsbury’s supermarket trading was in a holding pattern it said on Tuesday.</p>

Sainsbury’s supermarket trading was in a holding pattern it said on Tuesday.

That was better than investors expected, so for a while, the stock was set for its best day since May 2016—but it closed just 1% higher.

This short-lived bounce is worth scrutinising in our view given that rivals are building on stronger showings over the last 12 months compared to Sainsbury’s, which had an uneven quarter and uninspiring 2016.

For the 15 weeks to 7th January, the group said it trumped forecasts of a like-for-like dip of a similar magnitude to the 1% decline seen over its last half-year.

But that’s against a backdrop of what is looking like an outright revival around the other Big 4 grocers, and was also Sainsbury’s first positive like-for-like sales performance since the fourth quarter of its 2015/16 year.

Kantar Worldpanel had a similarly tepid reading on Tuesday of the No. 2 grocer’s recent performance. Its data has Sainsbury’s overall sales ticking 0.1% lower in a retailing environment that showed “the fastest recorded growth since June 2014″.

Under the circumstances, the group’s acquisition of Argos was further confirmed as a strategic success given the slow-motion snap back on the food side. Argos’ like-for-like sales increased 4%, well ahead of The City’s 1.5% expectation, with the home ware and electronics business continuing to offset unresolved concerns over volume growth in food in Q3.

This led CEO Mike Coup to say Sainsbury’s Christmas performance “reinforced the case” for acquiring Argos.

The problem is, whilst this was a nod to the group’s foresight in moving to diversify and get ahead of increasingly demanding consumer trends, it was also an admission—intended or not—that traditional supermarket sales were a let-down during one of the best Christmas seasons for years.

Additionally, with management directing investors’ attention to the strength of Argos over Christmas, we can also expect sentiment to be challenged by increased scrutiny of how well defended Argos is against competition from Dixons Carphone, Amazon among others.

That’s why initial relief propelled Sainsbury’s shares 7% higher at one point on Wednesday, but the move faded to little more than a 1% rise by the close.

It follows a low-flying 6% lift for the stock in 2016, against 60%-40% upswings at Morrisons and Tesco.                                 

 

To be fair, Sainsbury’s online groceries and convenience volume growth were great: up 9% and 6% respectively. And clothing and general merchandise also jumped: by 10% and 3%, suggesting an outright sales rebound could be close.

These signs enabled the group to say it was ‘comfortable’ with analysts’ 2016-17 profit forecasts.

However, with consensus for Sainsbury’s underlying pre-tax profit at £587m, according to Thomson Reuters, the group will still be flat after two years of falling income.

 

Again, clear comeback stories will look far more preferable alongside Sainsbury’s long-standing theme of running in place.

 

Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.