Sainsbury’s is still sliding

Sainsbury’s will reveal its third-quarter trading statement on 13 January, and the retailer is finding trading tough. 

Sainsbury's
Source: Bloomberg

The company will report its full-year numbers in May, and traders are expecting revenue of £23.46 billion and adjusted net income of £444 million. These forecasts represent a 1.3% fall in revenue and an 11.9% drop in adjusted net income. The firm will announce its second-half numbers on the same date, and dealers are expecting revenue of £10.88 billion which compares with the first-half revenue of £12.41.

The company confirmed its bid for Home Retail Group was knocked back, and that it is currently recessing the situation. There is some overlap between Sainsbury’s electronic products and what Argos offers, and the retailer has a good knowledge of Homebase as it sold it to Home Retail Group in 2000.

It appears that Sainsbury’s wants further diversification away from the grocery business, which is a sign it is nervous, but do two underperforming retailers make one good one?

Sainsbury’s is the only one of the big four UK supermarkets that increased its market share in the 12 weeks until early December. The supermarket is trying to lure back its old customers with price discounts but profits are falling. The firm has a joint venture with Netto as a means of gaining a share of the discount market. However it only has a handful of stores in the UK, and Sainsbury’s want to access its performance before expanding the venture.

Sainsbury’s is doing reasonably well compared to its peers when it comes to convenience store sales and online business. These are two areas that major supermarkets are paying more attention to, and if Sainsbury’s build on this it will stand to it in the long-term.

The price war took its toll on Sainsbury’s dividend which was trimmed late last year, and given how the business is performing further cuts are more likely to be the next move, rather than reverting back to the previous dividend. The retailer is not just facing fickle shoppers, it is also coming under pressure from increasing business rates and the introduction of the living wage in April which will add to its overheads. The combination of cutting prices and costs creeping higher will keep the outlook gloomy for the retailer.

Equity analysts are moderately bullish on Sainsbury’s, and out of the 24 ratings, six are buys, 11 are holds, and seven are sells. The average target price is 260p, which is 2% above the current price. Investment banks are more bullish on Tesco, and out of the 26 recommendations, nine are buys, 13 are holds, and four are sells. The average target price is 211p, which is 48% above the current price.

Sainsbury’s share price is down 60% since its all-time high in February 2007, and despite staging a modest recovery in the post credit crisis era it has taken another move lower. The stock trended lower through 2014 and sideways trading dominated 2015.

The share price is trapped in the range of 280p and 221p, while a breakout to the downside will bring the support at 215p (2003 low) into play, and a close below that level will bring 200p into sight. A close above 280p could put the stock on a path to 300p, and then the next resistance level will be found in the 335p region. 

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