Earlier this week, J Sainsbury (LSE: SBRY) published its Christmas trading update. The numbers were not good. For the 15 weeks to January 5, total retail sales declined 0.4% while same-store sales were 1.1% lower, excluding fuel. General merchandise sales, which include the Argos chain Sainsbury’s acquired in 2016, dropped 2.3%.
These numbers are particularly embarrassing for the company because peers, notably Tesco and Morrisons, reported sales growth across the festive period. Tesco, which published its numbers today, unveiled like-for-like sales growth of 2.2% in UK stores compared to last year.
Struggling for growth
Considering the above, it looks to me as if Sainsbury’s is struggling to attract enough consumers into its stores. It is difficult to tell exactly why some customers are shunning the brand. Indeed, Sainsbury’s is not alone. The broader retail sector has been reporting difficult operating conditions for some months, but it is notable that the company is struggling while peers push ahead.
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Clearly, Sainsbury’s has lost its way, and some consumers are losing confidence in the brand. The group’s planned merger with Asda may offer some relief regarding cost reductions, as my Foolish colleague Peter Stephens recently pointed out, but there is still only a 50/50 chance the merger will actually go ahead.
With Sainsbury’s facing an uncertain future, I think selling the stock could be the right course of action for investors today. If you are looking for somewhere to reinvest your funds, I reckon Card Factory (LSE: CARD) could be an exciting opportunity.
Outperforming
In the rough seas of the UK retail environment, Card Factory stands out as a company that has what it takes to weather the hostile environment.
The UK’s leading specialist retailer of greeting cards, dressings and gifts today reported sales growth of 3.4% for the 11 months to the end of December 2018. On a like-for-like basis, sales declined by 0.1%.
What I’m really interested in, however, is the growth at the firm’s online business. The update notes cardfactory.co.uk delivered revenue growth of 59.1% for the 11 months to the end of December 2018, following an increase of 65.8% in the same period last year. Granted, this is still a relatively small part of the overall business. Management estimates the group has around 1% of the £100m online personalised card market, implying total sales of just £1m compared to overall revenue of £400m+. But it is expected to start turning a profit this year. Any further sales growth should go straight to the bottom line.
With sales rising by more than 50% per annum, this online division will be a considerable driver of profits in the years ahead. Thanks to growth from the online business, as well as the contribution from new stores to overall sales, management expects to hit its profitability targets for the current financial year.
The City is expecting earnings per share of 17.4p and a dividend of 13p, implying a forward P/E of 11.2 and dividend yield of 6.7%. Based on today’s trading update, I see no reason why the company cannot meet these targets.
Overall, Card Factory’s growth looks to be hotting up, and this retailer appears to me to be a much better investment than Sainsbury’s.
