Todays update from JSainsbury(LSE: SBRY) is encouraging and shows that the company is moving in the right direction. While like-for-like (LFL) sales fell by 0.4% in the 15 weeks to 9 January, total sales were up by 0.8% (both figures exclude fuel). Looking ahead, Sainsburys expects LFL sales to improve in the second half of the year versus the first half.
The increase in total sales for the quarter was partly due to reduced levels of vouchering and promotional participation versus last year, with Sainsburys focusing instead on lower regular prices and fewer multi-buys. This is part of a new pricing strategy thatwill see Sainsburys attempt to simplify its customer offering. With consumers enjoying real-terms wage growth, theres the potential for improved performance as customers gradually become focused on less than just price over the medium term.
Total sales were also aided by a strong performance from online, with grocery sales up by 10% and orders rising by 15% versus the same period last year. Furthermore, general merchandise achieved sales growth of 5% in the quarter, with clothing posting an impressive increase in revenue of 6%, despite the unseasonably warm weather thathurt other clothing retailers. And with the companys banking division reporting an 11% volume growth in loans, the performance of Sainsburys non-food divisions continues to improve.
And the future?
Looking ahead, Sainsburys expects food deflation and pressures on pricing to equate to a challenging medium-term outlook. Therefore, the companys performance may continue to improve, but most likely at a rather modest rate. This is evidenced by forecasts for profitability in the next financial year, with Sainsburys due to report a fall in earnings of 2%.
Despite this, Sainsburys appears to be an appealing purchase at the present time. Thats at least partly because todays update shows real improvement from previous years when the companys performance showed little sign of improvement and it was engaged in a fierce price war with rivals. Although investment in pricing is set to continue, an improving UK economy means that this is likely to be on a smaller scale and this should aid margins over the medium-to-long term.
With Sainsburys trading on a price-to-earnings (P/E) ratio of 11.6, theres plenty of scope for an upward rerating. This could begin to take place during the course of 2016 since, as mentioned, the company expects an improvement in sales for the second half overthe first. As such, investor sentiment could begin to improve and with Sainsburys offering a yield of 4.2%, its total return could be highly appealing.
Certainly, theres still a very long way to go before Sainsburys is firing on all cylinders, but todays update shows that it has the right strategy and is enjoying improving trading conditions. Therefore, buying it now seems to be the right move for long-term investors.
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