Grocery, General Merchandise and Clothing sales were better than expected in the third quarter, with group like-for-like sales, excluding fuel, rising 8.6%. There has also been a significant rise in the number of online orders.
Sainsbury expects full year underlying pre-tax profit of at least £330m. This includes the repayment of £410m in business rates relief.
The shares rose 4.1% following the announcement.
Q3 surprised us, in a good way. Sainsbury has exceeded expectations, and made progress in some previously lacklustre areas. It's particularly encouraging to see Argos sales gaining momentum.
While we can't deny this supermarket has a new spring in its step, it's a mistake to assume coronavirus is an out-and-out tailwind for supermarkets. Consumer demand, workforce costs and logistics have all changed - potentially for the long-term.
That's resulted in some hefty costs, which are holding back profits. That's a common problem for all supermarkets, but there are some Sainsbury specific headwinds too.
The current crisis has resulted in an expedited reshuffling of the Argos store closure and integration programme. While that makes sense on paper, the costs involved are huge and general merchandise is more exposed to shifts in discretionary spending. When the economic outlook is gloomy, electrical and household items find themselves rubbed off shopping lists. Together those issues mean execution risk is high.
Groceries remain Sainsbury's bread and butter. And the group's been relying on discounted prices to help boost sales there. A huge increase in online capacity has helped, but the extra infrastructure comes with extra costs, so both of these developments are preying on margins, which were already a little thin. This trend could be set to get worse as the digital strategy accelerates.
The grocery sector is now more crowded than ever. Aldi and Lidl offer cheaper alternatives, then there are more upmarket offerings like Waitrose, M&S Food and Ocado. And with the latter two teaming up to boost M&S' online footprint, competition is at fever pitch. The sale of Asda and likely rejuvenation of the brand means we could be looking at another all-out price war. That makes the work Sainsbury's doing on its proposition very important.
There is work still to be done. But we are pleased with the direction of travel at Sainsbury, and we haven't said that for a while. For now, we'd like to see exactly how successfully the group turns its sound plans, and recent momentum, into profitable action.
Sainsbury key facts
- Price/Earnings ratio: 12.4
- 10 year average Price/Earnings ratio: 11.6
- Prospective dividend yield (next 12 months): 4.8%
All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.
Third quarter trading details
Grocery like-for-like (LFL) sales rose 7.4% in the quarter, compared to 0.4% this time last year and 5.1% in Q2. Online grocery sales were up 128%. Over the Christmas trading period Sainsbury invested in lower prices, and the sale of Taste the Difference and premium champagne did well.
General Merchandise LFL sales were up 6.0%, driven by an 8.4% increase in Argos sales, which was partially offset by a 5.4% fall in stores. Overall the division did better than expected, helped by a strong performance from Argos Fast Track home delivery and Click & Collect over Black Friday and Christmas.
Clothing saw a more modest 0.4% increase in LFLs, although this is an improvement on last quarter's 7.5% decline. Both General Merchandise and Clothing gross margins benefitted from a higher number of customers buying full price items. This was driven by customers shopping earlier for Christmas, and a change to the Black Friday strategy.
Fuel demand is still subdued, and fell 29.0% on a LFL basis in the quarter.
The group highlighted it's hired 68,000 new staff members since March 2020.
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