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J Sainsbury - full year profit to be at top end of guidance

Sainsbury's grocery sales were up 10.1% in the first half, following market share volume gains.

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Sainsbury's grocery sales were up 10.1% in the first half, following market share volume gains. General Merchandise sales were up 1.1%, with performance partially held back by a weaker Argos performance. Overall revenue was £17.0bn, up from £16.4bn last year.

The group has invested £118m in keeping prices low and continues to pursue a value-led approach. Higher end ranges are also performing well, with Taste the Difference volumes rising over 8% in the second quarter.

Underlying retail operating profit of £485m was a 2% improvement.

Retail free cash flow of £520m was lower than last year's £759m, partly because of higher capital expenditure.

Sainsbury's expects underlying pre-tax profit to be at higher end of guidance range, at £670m - £700m.

An interim dividend of 3.9p was announced, in-line with last year.

The shares rose 3.9% following the announcement.

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Our view

Sainsbury's is putting up a good fight in the battle for footfall. Its value driven approach has taken competitors, especially the discounters, head on, and the market share gains show something's been done right.

There are a few things driving this momentum. One is a direct tackling of the discounters through things like Aldi Price Match and Nectar prices. There have been concerted efforts to improve grocery product ranges too. This has happened faster and more effectively than we'd feared, and has helped progress. Impressive uplifts in Taste the Difference demand suggests customers are also leaning towards treating themselves at home, which bodes well.

While the value-led strategy has paid off, offering value doesn't come cheap. Profits aren't shooting the lights out. Those in the middle of the market, like Sainsbury's, are most exposed in these tough times. It means the group has no choice but to get its hands dirty and fight for customers with the likes of Tesco and, increasingly, Aldi. That puts a firm ceiling on margins, and it's unclear when things will fire back up. We're cautiously optimistic that the worst of this is unwinding, but mapping this trajectory perfectly is very difficult.

The cost saving programme is helping to combat rising costs and progress has been good. The 3-year, £1.3bn target by 2023/24 remains on track.

Sainsbury is especially exposed to General Merchandise, with its ownership of Argos. We need a longer run of positive progress before saying things are permanently on the up. This type of revenue is even more difficult to capture when the economy is sluggish - dinner needs putting on the table no matter what, but new mugs, tablemats and toasters can wait.

Looking ahead more broadly to the next few months, Sainsbury's extensive product improvements, and the strong demand for higher end ranges, could mean the group's in for a merry Christmas. But these are trends that will need monitoring closely. The discounters and other mid-value supermarkets have also stepped up their game, and as belts are tightened, it could lead to customers being even more discerning about where their pennies are spent in what is an incredibly expensive period for families. Only time will tell.

The balance sheet is also in better condition, with the group hitting its four-year £950m net debt reduction target a year ahead of schedule. Along with the £600m+ of retail free cash flow last year, there's some significant weight behind the healthy prospective yield. Remember, no dividend is guaranteed.

We continue to be pleased with the direction of travel at Sainsbury. Demand is holding up better than we feared. Grocery competition is fierce though, and the uncertain environment isn't currently reflected in the group's valuation in our view.

Sainsbury key facts

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.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. 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 disclosure for more information.

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Written by
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 2nd November 2023