Sainsbury's Results Boosted by Argos Sales

In the non-food segments, Argos is gaining market share, with strong growth in the mobile, audio, and tech categories

Morningstar Equity Analysts 4 July, 2017 | 4:44PM
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Sainsbury’s (SBRY) reported strong trading performance for first-quarter 2017/18, with like-for-like sales up 2.3%, excluding fuel, and with transaction growth in all channels. Despite the top-line performance exceeding our expectations, our fair value estimate and no moat rating are unchanged. We believe hard discounters remain the main competitive threat on both the medium- and long-term horizons, and strong top-line growth in the first quarter isn't sufficient to change our stance on the industry.

The firm reported good results in the clothing segment at 7.2% growth, followed by grocery at 3.0% and general merchandise at 1.0%. In the grocery segment, Sainsbury’s invested in new product lines, as well as space expansion, with one new supermarket and 10 convenience stores opened in the quarter. In the non-food segments, Argos is gaining market share, with strong growth in the mobile, audio, and tech categories.

The company is on track to open around 135 Argos Digital stores by the end of 2017/18. Argos online sales were up 10%. We feel Sainsbury’s has a solid online operation as one of the first movers, having operated online since 1997, and with its position enhanced by the Argos acquisition. With close to 100% coverage of the U.K. population, we believe Sainsbury’s can face competitive pressures in the online channel.

Investment Thesis

Sainsbury’s, is the U.K.'s second-largest supermarket chain with a 16.5% market share and operations in the U.K. only. It has resisted the onslaught of hard discounters quite well in recent years, losing only a small amount of market share, and while operating margins have come under some pressure, they have not collapsed like those of its peers. Sainsbury’s market share is still higher than a decade ago.

This resilience stems from good management and the benefits of past restructuring: Sainsbury’s has significantly narrowed its price premium; the value proposition has improved as non-food and financial services complement the food offer, leading to a higher average spend per customer; capital allocation is more prudent; and Sainsbury’s has successfully focused on fresh produce and convenience, trends consumers are driving. Sainsbury’s profitability was never excessive to start with, explaining less of a correction in margins.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Sainsbury (J) PLC232.30 GBX1.31Rating

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Morningstar Equity Analysts  Morningstar stock and fund analysts cover 2,000 mutual funds, 2,100 equities, and 300 exchange-traded funds.