Interactive Investor

Christmas comes late for Sainsbury’s as profit forecast rises

7th January 2021 10:16

Richard Hunter from interactive investor

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Supermarket chain’s online boom hikes underlying profit expectations by £60 million.

Sainsbury's (LSE:SBRY) certainly enjoyed the festive break and has upped its guidance as a result.

In an announcement brought forward by a week, the group now expects underlying profit for the year of at least £330 million, against previous estimates of £270 million. While this would still represent a decline of 44% from the previous year’s figure of £586 million, it is nonetheless an upgrade during what has been a perilous period.

Perhaps not surprisingly, the online offering is the star of the show at present. Total digital sales grew by 81% and now represent 44% of total sales, underpinned by growth of 128% in grocery sales.

At the same time, Argos performed better than expected both over the Black Friday and Christmas periods, with sales growth of 8.4%.

Swift transformations to online have been a feature of enforced pandemic changes to company behaviour.

For Sainsbury, which operates in a fiercely competitive arena, the outlook will remain challenging, particularly given the pressure on pricing that the sector demands. There will also be significant costs arising from the redefinition of the business in the form of the overhaul of the Argos store estate and the extension to its convenience store format in the shape of its new ‘Neighbourhood Hub’.

In the meantime, the resumption of payments to shareholders in the form of a special dividend results in a current yield of around 4.5%, which is punchy in this environment. The 24% spike in the share price over the last six months has undone much of the damage caused by the general economic outlook and costs relating to the pandemic. But the shares remain marginally down, by 0.6% over the last year, as compared to a decline of 9.7% for the wider FTSE 100.

On balance, and based on prospects following its transformation, the current market consensus of the shares as a ‘buy’ is likely to remain intact.

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