Interactive Investor

Sainsbury's in demand after beefing up profit prediction

Sales were up across many lines in the first half, especially at the grocery business, giving the supermarket chain greater confidence in the full-year outcome. ii's head of markets walks us through these latest results.

2nd November 2023 08:41

by Richard Hunter from interactive investor

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      Sainsbury (J) (LSE:SBRY)'s relentless focus on value is reaping some rewards, which could position it well in the lead up to the key Christmas trading period.

      Its value offerings, which now include the availability of Nectar on 6,000 products, comes alongside a decline in food inflation, where the group states that these savings are being passed on to customers. This has been reflected in a bounce of sales across many of its lines during the 28 weeks ended 16 September 2023, with like-for-like sales growth of 8.4% excluding fuel representing a good return, if slightly shy of the 9.8% achieved in the first quarter.

      Grocery sales are a particular focus of growth as Sainsbury's continues to return to its knitting, with an increase of 10.1% over the period. General Merchandise also rose by 1.1%, buoyed by a 3.3% bounce in sales from Argos, where strong sales of electronic equipment offset seasonally quieter trends. At the same time, with Sainsbury's having relocated many of the Argos stores into its own existing supermarket space, the fixed cost base has been reduced, which inevitably boosts margins.

      Clothing sales on the other hand remain a concern. A decline of 8.4% followed a combination of competition and unseasonal weather and in the absence of any seasonal sale promotions. The recent release of UK retail sales in September had already provided a warning sign, where a notable fall reflected the fact that cost-of-living pressures were weighing on customers, particularly with regard to non-essential goods.

      This remains an area in which Sainsbury's retains a keen interest, although the currently concerted focus on Grocery is to some extent at the expense of the clothing lines.

      Keeping shopping prices low has had a positive impact on the group’s market share, but of course this comes at a cost to Sainsbury's itself. Since March, for example, the company has invested £118 million on price reductions. The ferocity of competition, particularly in the supermarket arena, is well established and shows little sign of abating, such that the group will need to keep a constant lid on prices in order to remain in the mix.

      At a headline level, revenues increased by 3.5% while, due to some accounting items pre-tax profit fell by 27% to £275 million, with underlying profit flat at £340 million. Rather more positively, the group has increased its forecast for the full year to a range between £670 to £700 million, from a previous guide of £640 to £700 million. At the same time, the company’s cash generative ability is also in focus, with Sainsbury's now expecting retail cash flow of at least £600 million for the year, versus a previous estimate of £500 million.

      This has also led to a further £700 million reduction in net debt to £5.6 billion, while also enabling the dividend to be maintained. The yield is well covered from earnings, and at 5% it remains something of an attraction to income-seeking investors. Meanwhile, the target of £1.3 billion of cost savings by March 2024 is still comfortably on track.

      The shares have performed strongly of late, having risen by 31% over the last year, as compared to a gain of 2.8% for the wider FTSE100 index. Over the last two years, however, the price is down by 11% which gives some perspective regarding ongoing challenges which the group faces.

      Indeed, the fiercely competitive sector applies not only to consumers but also to investors, as evidenced by the market consensus, where the gulf between itself and Tesco (LSE:TSCO) is in plain sight. Tesco is comfortably the preferred play in the sector, while the general view for Sainsbury's remains rooted at a 'sell' despite its own valiant efforts.

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