Sainsbury's Upgraded to Neutral by Goldman Sachs Following Argos Sale

Goldman Sachs upgraded its rating on J Sainsbury (SBRY) to "Neutral" from "Sell" on Tuesday, citing the supermarket chain's planned disposal of its Argos subsidiary. The investment bank also raised its 12-month price target on the stock to 360 pence from a previous 325 pence.

Argos Sale Removes Key Overhang

Analysts at Goldman Sachs said the sale of Argos to Swift Partners, announced on July 31, removes the primary risk that underpinned their previous negative rating. The bank's prior "Sell" thesis was based on a challenging outlook for the general merchandise retailer, driven by competitive pressure and weak UK consumer spending, which it noted was suffering from the lowest household cashflow growth since 2009, excluding the pandemic period.

The disposal aligns with Sainsbury's "Next Level Strategy," which focuses on its core food business. Goldman Sachs noted the move demonstrates the company's commitment to strategic changes centered on becoming the "first choice for food" and leveraging sales growth for increased profitability.

Financial Impact of the Deal

While the transaction has strategic benefits, Goldman Sachs projects a neutral impact on both cash and underlying operating profit. The key financial terms of the deal include:

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• Total Proceeds: At least £120 million, with £70 million payable on completion and a further £50 million deferred over three years.
• Net Cash Impact: Expected to be neutral, as proceeds will likely be offset by separation costs.
• Profitability: The bank forecasts a low-single-digit accretion to underlying earnings per share (EPS). This is because income from new commercial agreements with Swift Partners and reduced lease interest expenses are expected to outweigh dis-synergies and the lost £9 million in underlying operating profit from Argos in fiscal 2026.

The deal is targeted for completion by February 2027, with a full separation of the businesses planned by February 2029.

Updated Valuation and Outlook

The new 360 pence price target is based on an updated discounted cash flow (DCF) model, incorporating a lower market beta and risk-free rate. The target implies a valuation of 14 times Goldman's fiscal year 2028 EPS estimate, an increase from 13 times previously.

Despite the upgrade, the bank's own financial forecasts for Sainsbury's remain unchanged and sit slightly below consensus estimates. Goldman's retail sales growth projections for fiscal 2027 and 2028 are 40 and 20 basis points below Visible Alpha consensus, respectively, while its pre-tax profit estimates are 1% to 4% lower. Sainsbury's has reiterated its fiscal 2027 guidance for underlying EBIT of £975 million to £1.08 billion.