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J Sainsbury - full year profits expected at top end of guidance

Total retail sales, excluding fuel, rose 5.2% in the 16 weeks to 7 January.

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Total retail sales, excluding fuel, rose 5.2% in the 16 weeks to 7 January. This included growth of 7.1% during the Christmas period. Grocery sales were 5.6% ahead in the quarter, and 12.5% up on pre-pandemic levels. The increase largely reflected higher prices and a good response to the group's efforts to improve value-for-money. Sainsbury's is still increasing prices behind its competitors which it says helped performance.

General Merchandise sales rose 4.5% after a strong showing from Argos over the key Christmas week. This included attracting customers by offering discounts, improved stock availability and ''reliable' Christmas gift options. Clothing sales were up 1.3% on last year.

Recent performance means the group now expect full year underlying profit before tax to be towards the upper end of the £630-£690m guidance range. Retail free cash flow's also expected to be £600m, compared to previous guidance of ''at least £500m''.

The shares fell 1.8% following the announcement.

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Our view

Sainsbury's recorded a resilient third quarter. That's been helped by a strong performance over Christmas. As the costs of living crisis rumbles on, Sainsbury is throwing a lot at becoming better value.

A fresh round of investment in keeping prices low means the group's been able to raise prices after its competitors, offering its strongest value proposition in years.

While this strategy has paid off, offering value doesn't come cheap. For now, the group's increased sales are offsetting this, but as people's incomes continue to come under pressure, we wonder how long Sainsburys will be flavour of the month. Over a million customers switched to the German discounters over Christmas and it's not yet clear how many of those will come back. Those in the middle of the market, like Sainsbury's, are most exposed in these tough times.

Cost pressures are also in the mix. Some of that is due to the types of promotions on offer, Sainsbury is focused more on offering low shelf prices on individual items than pushing deals like 3 for 2.

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

One of the risks with keeping prices low is there's less wiggle room if volumes fall. Underlying Retail operating profit margin dipped below 3% in the first half. That doesn't leave too much room for error if volumes don't keep pace. While profit's expected at the top end of guidance - that guidance is still a result of recent downgrades.

Sainsbury is especially exposed to General Merchandise, with its ownership of Argos. Stock levels are back, and we've been pleasantly surprised by how well Argos performed over Christmas. Demand for electrical goods held up despite the pressure on incomes. We'll be monitoring demand from here. We'd like to know how much of this boost came from the Royal Mail strikes, which forced customers to shop elsewhere in the run up to Christmas.

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 expected £600m or more of retail free cash flow this year, there's some significant weight behind the healthy prospective yield of 6.1%. 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: 11th January 2023