A decision by Sainsbury (J) (LSE:SBRY) to go back to basics is reaping clear rewards, as its Grocery business continues to thrive amid a famously competitive backdrop.
The group’s relentless focus on value offerings comes at a cost to the company, but the subsequent rewards are sales which are currently defying gravity. Grocery sales over the third quarter rose by 9.3%, compared to 7.4% the previous year and by 8.6% over the Christmas period. Such offerings include the availability of Nectar on 6,000 products, coming alongside a decline in food inflation, where the group previously stated that these savings were being passed on to customers.
The availability of discounts came into their own over the festive period, bolstered by seasonal offers which underpinned the sales growth. The company estimates, for example, that it grew volumes ahead of the market during the period due to its focus on fresh food, where it outperformed in Meat, Fish, Poultry, Dairy, Fruit and Vegetables. It also launched 370 new products over the quarter, including more than 170 Taste the Difference products for Christmas, resulting in some record sales across certain lines.
Inevitably, this laser focus as the company returns to its knitting in grocery is not being mirrored in other parts of the group. General Merchandise sales dipped by 0.6% in the 16 weeks to 6 January 2024 and by 3.7% over Christmas, while Clothing fell by 1.7% and 6% respectively.
There have been many warning signs over the last few months that the consumer is becoming increasingly selective in non-essential items which, coupled with other competitors specifically concentrated in this space, has somewhat left Sainsbury's trailing.
The situation at Argos, meanwhile, is mixed. Sales were down by 0.9% in the quarter and by 4.2% over Christmas, coming in against some strong comparatives from the previous year. Then, the brand had seen the benefit of growth arising from strong demand for energy saving products as well as a postal strike which drove customers to stores.
Even so, the group maintains that Argos outperformed a highly promotional market in the quarter, with a strong performance in particular on Black Friday. However, this may have resulted in a slightly weaker lead up to the Christmas period as customers may simply have been making festive purchases early, especially in the electronics and toys categories.
More detail will follow at the group’s strategy update in February and, in terms of the financials, at its full-year results in April. In the meantime, the company is maintaining its guidance for pre-tax profit to be between £670 million and £700 million, with retail free cash flow of £600 million. The group’s previous update also revealed a further £700 million reduction in net debt to £5.6 billion, while also enabling the dividend to be maintained.
The dividend yield remains well covered from earnings, and at 4.3% is something of an attraction to income-seeking investors. Meanwhile, the target of £1.3 billion of cost savings by March 2024 was still comfortably on track at that time and will be an area of focus when the company reports for the year.
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The shares have had a good run as its progress has pleased investors, with the price having risen by 24% over the last year, as compared to a marginal decline of 0.1% for the wider FTSE 100 index. More recently, industry figures had revealed that it was likely that the supermarkets would have enjoyed a strong festive season, and Sainsbury's has certainly seen a continuation of its Christmas success over recent years.
However, the strategy update will take on added significance as the company signals its current approach to further expansion and growth. In particular, the initial share price reaction reflects the fact that across the entire business there are pockets which will require additional focus to redress some of the balance between dwindling General Merchandise and outperforming Grocery sales.
In the meantime, the market consensus has moved away from its previous sell rating, with the general view now coming in at a firm hold ahead of the next leg of the group’s development after this generally successful quarter.
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