By all rights the Sainsbury’s (LSE: SBRY) share price should be climbing today (10 January). Instead, it’s dropped almost 3%.
This morning’s Q3 results should have the champagne corks popping with sales jumping 3.8% over the four weeks to January 4.
Party food sales were up nearly 40%, with more than 200 bottles of fizz sold every minute over Christmas. This is brilliant news because retail stocks can take a beating if they don’t deliver some festive fun.
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It also puts today’s economic gloom into perspective. Shoppers still have money to spend as wages rise faster than inflation.
A happy New Year for this FTSE firm?
Sainsbury’s now expects annual underlying retail operating profit to increase 7% in the current financial year. That puts it bang in the mid-point of its guidance range of between £1.01bn and £1.06bn.
Hargreaves Lansdown equity analyst Aarin Chiekrie praised the Sainsbury’s drive to improve quality, value and service: “It’s managed to claw more market share from the competition and deliver its seventh consecutive quarter of volumes growing ahead of the sector average.” Given all the good news, why are its shares falling?
Third-quarter sales rose at the slightly slower rate of 2.8% on an underlying basis. While grocery sales jumped 4.1%, general merchandise and clothing fell 0.1%. Sales at the group’s Argos business fell 1.4%.
Chiekrie warned its general merchandise operations puts it in the most cyclical area of the supermarket economy: “This really slows you down when times get tough.”
Sainsbury’s has cemented its position as the UK’s second-biggest grocer after Tesco, with market share up to 16%, according to Kantar. That’s comfortably ahead of Asda at 12.5%.
Sadly, its share price hasn’t done anywhere near as well. It’s slumped almost 15% over the last year. Over the same period, Tesco is up more than 22%.
A top dividend stock with a low valuation
On 17 December I wrote that stock markets had underestimated Sainsbury’s. That still appears to be the case. It now looks incredibly cheap, with a price-to-earnings ratio of 11.91, and I feel it’s worth considering. The trailing dividend yield has crept above 5%. Shareholder payouts look well supported by £500m of free cash flow.
It’s yet another example of how downbeat economic sentiment has hammered FTSE 100 valuations. This offers an opportunity for long-term investors to pick up a solid blue-chip at a reduced price, and hope it enjoys a re-rating at some point.
The 12 analysts offering one-year share price forecasts have produced a median target of just over 310p. If correct, that’s up more than 20% from today. Combined with that yield, this would deliver a total return of 25%. No guarantees, of course!
2025 still looks like being a tough year. Resurgent inflation will drive up costs and squeeze shoppers. Plus Sainsbury’s also has to cover Labour’s employers’ National Insurance hike, as well as the inflation-busting rise in the minimum wage. The UK grocery market remains intensely competitive.
The shares look like a bargain but investors may have to be patient. That re-rating will take time. It may never happen. But today’s low valuation gives a margin of safety, and there’s always that yield.
