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Company Focus || Stock reduction for supermarket giant || 1-5-20

Supermarket stalwart Sainsbury’s saw its stock hit the reduced section this week after unveiling desultory results and a warning of a possible £500m hit on profits.

Shares in the supermarket giant fell almost three per cent in the wake of its full year results, now standing at 198.10p at the time of writing.

While the results were far from terrible, they did not include post-pandemic trading, and the outlook there was not enough to reassure investors.

To March, the supermarket revealed that underlying pre-tax profit was down two per cent to £586m and pre-tax profit had risen 26 per cent to £255m so while results looked flat, they were not catastrophic.

After the coronavirus crisis kicked in, however, sales have not spiked as well as they have for some of its rivals. Tesco, for example, has seen more than half the upswing in sales of its counterpart and while Sainsburys did see an initial sharp rise due to panic buying, demand has normalised since.

So, what’s the outlook for the supermarket – should investors bulk buy or is it better off shelved for now?

Like many companies in the current climate, Sainsburys has put its dividend on hold and it says there are many uncertainties surrounding the current situation. In a statement it stated that: “Given the wide range of potential profit and cash flow outcomes, the board believes it is prudent to defer any dividend payment decisions until later in the financial year, when there will be improved visibility on the potential impact of Covid-19 on the business.”

Sainsburys did say that it expected the £500m hit to be offset by £450m of business rates relief and stronger grocery spending but analysts still seem concerned. Berenberg had already double downgraded the supermarket, ahead of its full-year results, from ‘buy’ to ‘sell’ and lowered its target price to 170p a share.

Hargreaves Lansdowne pointed out that Sainsbury’s seem to be relying on discounting to compete with other supermarkets, and that other parts of its business such as Argos and its bank are particularly vulnerable to the current economic climate. It did go on to praise Sainsbury’s balance sheet and clothing sales though, saying: “Credit where it’s due, the clothing business had been making good headway, and when the dust settles, we’d hope this trend can continue. We can’t knock the work that’s been done to reduce debt either, meaning the balance sheet is in reasonable health.”

Current CEO, Mike Coupe, retires at the end of May and it will be up to his successor Simon Roberts to try and guide Sainsburys through the storm.

With a forecast price-to-earnings-ratio of just 10, could shares in the supermarket giant be a bargain? Of course, it depends on how long the current crisis and probable subsequent recession ends up lasting.

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