As I write this, Sainsbury (LSE: SBRY) shares are down more than 4% on the day. I have to admit, when looking at its earnings results I am not really sure why. Or rather I know why, but I think the concerns may be unfounded.
Sainsbury’s earnings numbers were not very exciting. Group sales were pretty flat, while pre-tax profit fell 2%. Worse still for investors, the company said it would be deferring the decision on a dividend to the autumn. By comparison, Tesco recently confirmed it would be going ahead with its dividend. Investors notice such things.
Coronavirus
For me however, this all seems to be missing one key element – coronavirus. Though it has dulled down now, the first quarter of this year saw panic buying create a surge in food demand for supermarkets. Meanwhile, even with lockdown, stores such as Sainsbury have remained open as essential.
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What’s more, online grocery shopping has increased as people avoid public places. Generally speaking, online delivery is more cost-efficient for supermarkets. A shift from one to the other should, in theory at least, be helping margins.
Of course it’s not all clear sailing. Sainsbury sells many non-food items as well, almost all of which are likely to see declining sales. Clothes particularly are not likely to see demand increasing while people are locked in the house.
Interestingly, Sainsbury did say that while it expects such non-food sales to decline this year, sales at its Argos brand are in fact still growing. Presumably being locked inside has led to increased demand for gadgets and games.
Sainsbury in lockdown
Sainsbury has also seen some direct costs associated with the coronavirus. Specifically, it is expecting to spend an additional £500m this year on staff protection measurers, such as plastic screens at checkout.
However Sainsbury is also expected to benefit from the business rates holiday introduced by the government. This should help the company to the tune of £450m – almost offsetting the direct costs.
CEO Mike Coupe laid out his expectations for the lockdown timeline today as well. He said Sainsbury is assuming full lockdown will continue to the end of June, followed by “some releasing of the shackles during September and some form of social distancing in place for [the] remainder of the year”.
The dividend question
Though the decision to delay a dividend decision is not great, I also don’t think it is as bad as we may think. Given that Sainsbury is likely to see cash costs offset by gains elsewhere, it seems to me perhaps more cautionary that necessary.
If we then make the assumption that Sainsbury will go ahead with a dividend this year, now could be the perfect time to buy. Sainsbury has often appeared oversold to me, and in all honesty I am not sure why the market seems to have that tinge to it.
Personally I would expect its results this year to be neutral at worst, though likely strong. Today’s dip may just be a perfect opportunity to me to buy more Sainsbury’s stock.
