Interactive Investor

Have Sainsbury's shares passed their best before date?

4th November 2021 08:32

Richard Hunter from interactive investor

The takeovers of Asda and Morrisons caused excitement around Sainsbury's shares, but they've fallen since. Our head of markets discusses half-year results and investment potential.

A sharp reduction in costs has been the major driver in improving half-year profits at Sainsbury's (LSE:SBRY), but the fiercely competitive environment remains a concern.

Quite apart from competition provided by the discounters such as Aldi and Lidl, the recent sales of Asda and Morrisons could see renewed and invigorated propositions, while Marks & Spencer (LSE:MKS) and Ocado Group (LSE:OCDO) provide further food for thought, let alone the ominously increasing Amazon (NASDAQ:AMZN) presence.

At the same time, these results come against some very strong comparatives against the various stages of the pandemic, customer behaviour is now beginning to normalise and grocery growth is expected to moderate throughout the remainder of the year. The transformation of the Argos offering is also a strategic distraction, which inevitably comes at a price.

Indeed, in its day to day business, Argos is seeing the effects as demand lessens for home office equipment and technology and as the extra challenges of supply chain issues adds to the mix. More positively, the consumer electronics and home and furniture lines are holding up, while the integration of the Argos and Habitat supply chains should provide significant savings. Added to the group-wide reduction of restructuring and impairment costs, the overall impact could be an ongoing boost to profits.

The pre-tax profit number compares favourably with last year, having risen by 23% in the 28 weeks ended 18 September, and rather more against pre-pandemic levels, where the number has soared by 56%. Group sales have increased by 5.3%, boosted by a rise of 62.7% in fuel sales, although the latter still remains below those of 2019. General Merchandising sales have decreased by 5.8% against some strong lockdown comparatives, although clothing sales have picked up some of the slack, with sales up by 33.6% against 2020 and 9.1% against 2019.

A clear beacon of optimism can be seen in the online offering, which Sainsbury's has been ramping up at pace. Within Grocery, sales have risen by 13% over the last year and by 128% against pre-pandemic levels and now account for 17% of total sales as compared to just 8% pre-pandemic. While this has also come at a cost, the appeal of online shopping is further enhanced by some refreshed offerings, such as in the Click & Collect delivery times.

In terms of outlook, Sainsbury's is leaving its expected full-year pre-tax profit unchanged at £660 million with the normalisation of habits gaining further traction. Investment in price competition will also play a key role in the immediate future, especially with the impending and important Christmas season approaching.

The shares have had a good run of late, with some M&A activity in the sector providing additional froth and have risen by 39% over the last year, as compared to a hike of 23% for the wider FTSE100. However, the market consensus of the stock has recently slipped to a "hold", suggesting that the price is now up with events in the absence of any further meaningful developments at Sainsbury's, or indeed the sector as a whole.

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