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Sainsbury - sales ahead of expectations

William Ryder, Equity Analyst | 6 July 2021 | A A A
Sainsbury - sales ahead of expectations

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Sainsbury (J) plc Ordinary 28,4/7p

Sell: 283.70 | Buy: 283.80 | Change 0.00 (0.00%)
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Over the first 16 weeks of the year, like-for-like sales rose 8.4%, and excluding fuel they were up 1.6%. That reflected a better than expected performance across Grocery, General Merchandise and Clothing.

Shopping patterns are starting to normalise, but online shopping remains elevated, accounting for 18% of Grocery sales compared to 8% during the same period in 2019.

The group expects to reduce its retail operating costs to sales ratio by over 200 basis points and report underlying profits before tax of at least £660m at the full year.

The shares were broadly flat following the announcement.

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Our view

Sainsbury is coping well with the post-pandemic challenges on its plate.

Relaxing restrictions mean shopping trends are starting to normalise, but consumer demand, workforce costs and logistics have all changed - likely for the long-term. That's resulted in some hefty costs, with new store layouts, closures and extra headcount holding back profits. That's a common problem for many supermarkets, but there are some Sainsbury specific headwinds too.

The pandemic 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. Lockdown-friendly electrical and household items found 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.

For all that, there are some bright spots. Clothing sales are on the rise despite high-street shops reopening, suggesting habits customers picked up during lockdown were sticky. The balance sheet is also in better condition, which gives the group more breathing room while it attempts it restructure.

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 plans, and recent momentum, into profitable action.

Sainsbury key facts

  • Price/Earnings ratio: 13.2
  • 10 year average Price/Earnings ratio: 11.5
  • Prospective dividend yield (next 12 months): 4%

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.

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Trading Update

Grocery sales rose 0.8% as shopping trends normalised and online orders came down from their peak. Compared to 2019 levels, grocery sales rose 11.3%. The group's seen 'encouraging' results from its Aldi Price Match campaign and has committed an additional £50m to price reductions. Groceries Online sales rose 29% from 2020 levels and 142% from 2019.

Although General Merchandise sales at Sainsbury's Supermarkets were up 11.2%, total General Merchandise was down 1.4%, reflecting a 3.7% decline at Argos. But compared to 2019 levels, General Merchandise sales were up 5.6%. Strong Home and Furniture sales in this division were offset by declines in lockdown-friendly categories like electronics, toys and seasonal products.

Clothing sales rose 57.6% from 2020 and 15.5% from 2019. Full-price sales were up 95% with strong growth in seasonal and womenswear ranges.

Demand for Financial Services is still below pre-Covid levels, though demand for credit rose somewhat during the quarter.

The group's 'making good progress' with its Argos transformation programme, opening 20 Argos stores inside Sainsbury's supermarkets during the quarter. This brings the total to 356.

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.