Investors Aren't Buying the Sainsbury's Recovery

The Week: Morningstar columnist Rodney Hobson looks at Sainbsury's, Primark owner Associated British Foods and Marks & Spencer

Rodney Hobson 6 November, 2020 | 9:01AM
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The Week

It has been a mixed week for companies that combine food with clothing and other non-food items. While the shadow of Covid-19 hangs over the latest pronouncements, there are wider long-term issues at play.

The most positive update came from supermarket group Sainsbury (SBRY), in which I hold a stake. I’ve been far from happy as my once-profitable purchase has been whittled away – although the dividends have more than compensated – but the half-year report made generally encouraging reading.

Total sales rose 7.1% in the 28 weeks to 19 September 19, with like-for-like sales 6.9% higher. Digital sales, which have been a vital channel during the epidemic and are surely going to increase in importance, now account for 40% of sales, having more than doubled compared with last year. 

Business rates relief has paid for most of the cost of coping with Covid-19 and full year underlying profits are now expected to be 5% higher than last year, with £301 million clocked up in the first six months. This is a real improvement on the position during the first lockdown when the cost of coping with the virus was eating up all the gains from higher turnover.

Sales have been stronger than expected at Argos but here lies the one negative factor. The cost of closing standalone stores has pushed the group into a £137 million loss.

Shareholders are placated with a 7.3p dividend in lieu of last year’s final and a 3.2p interim this time. It will be paid before Christmas.

The market did not share my enthusiasm and Sainsbury shares promptly fell back below 200p, which I felt was most unfair. I can’t see them zooming away any time soon but they surely have bottomed out at the current level.

Primark Store Closures

While I remain unconvinced that Argos, which sells a wide range of non-food items, fits comfortably with Sainsbury’s mainly food supermarkets, at least they are both in retailing. Associated British Foods (ABF) has food processing sitting alongside clothing retailer Primark and it is easy to believe, as I suspect, that management is never on top of both at the same time. With the impact of Covid-19, it may not be on top of either.

Sales are down 12% in the year to September 12 and profits are off by more than a third. The dividend remains suspended, although I expect it to be reinstated at a lower level during the current financial year.

The problem is that in prior years Primark effectively carried the food side. With Primark stores closed for much of this year, the impact of some recovery on the food side has been muted.

The board remains confident for the next 12 months, investors less so. The shares sit uncomfortably around 1,700p and could well slip back. They have been below 1,650p several times since the February crash.

Marks & Spencer in the Doldrums

AB Foods still looks a lot more attractive than Marks & Spencer (MKS), where clothing and home sales have been propped up by burgeoning food sales.

For the 26 weeks to September 26, chief executive Stave Rowe claimed: “Our performance has been much more robust than at first seemed possible.”

He was rather less forthcoming on the £87.6 million pre-tax loss, which somehow managed only eighth place out of the update’s eight bullet points. Nor did he have much to say about a further slump in home and clothing sales, the 40% drop in the latest period being exacerbated by the shutdown of stores in the last lockdown.

The shares are stuck below 100p. Five years ago they were worth five times as much. There is no reason to believe that better times are just around the corner.


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About Author

Rodney Hobson

Rodney Hobson  is a columnist for and author of several investing books, including The Dividend Investor and How to Build a Share Portfolio.

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