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Sainsbury's fails to win over bearish Goldman Sachs

Published: 12:33 12 Jan 2017 GMT

Argos retail centre
Goldman Sachs thinks margins remain under pressure at Argos

Better-than-expected fiscal third quarter sales from supermarket titan J Sainsbury plc (LON:SBRY) have not made a believer out of heavyweight broker Goldman Sachs.

Goldman’s has reiterated its ‘sell’ recommendation, citing perceived gross margin pressure at recently acquired Argos and the supermarket chain's own caution on the state of the market, once everyone sobers up from the Christmas bingeing and goes on a diet.

Argos reported like-for-like sales growth over the Christmas period of 4%, which was well ahead of market expectations of growth of 1%.

Sainsbury’s management said it remained comfortable with the consensus forecast for current fiscal year profit before tax of £573mln, whereas Goldman believes the top-line performance at Argos should have led to upgrades in earnings before interest and tax of £10mln to £20mln; the fact that guidance was not lifted suggests sales have come at the cost of margins.

Goldman moved its below consensus profit before tax forecast of £558mln up to £567mln, reflecting slight better-than-forecast sales.

As for the outlook, Goldman noted management's concerns over sterling’s collapse and how this might feed through to inflation. This adds weight to Goldman’s view that recent market data, covering the abnormal Christmas period, might have overstated the underlying strength of the sector.

It will be waiting for the next release of industry data from market research group Kantar on 7 February to get a clearer picture of the sector’s well-being.

“Though not Sainsbury specific, in our opinion this will be negative for sector sentiment and thus Sainsbury. Further, as we have previously written we think inflation will be difficult to pass through, and with lower cost savings than peers, SBRY will see the most negative margin impact,” Goldman’s retail team said.

Notwithstanding the enduring caution, Goldman has grudgingly raised its 12-month target price from 195p to 200p.

Sainsbury’s shares currently trade at 257.5p.

 

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