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J Sainsbury - like for like sales drop, guidance intact

First half Group revenue came in at £16.4bn, an increase of 4.4%.

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First half Group revenue came in at £16.4bn, an increase of 4.4%. Excluding fuel, underlying retail sales of £14.7bn reflected a 0.8% drop in like-for-like (LFL) growth. Sales improved over the half, as the first quarter came up against a tough comparable period the year before, when lockdowns were in effect.

Grocery sales were the strongest performer, up 0.2%. Both General Merchandise and Clothing saw sales fall, 6.1% and 6.0% respectively.

Underlying operating profit fell 8% to £496m, the drop a result of investment in keeping prices as low as possible and the impact of "considerably higher than expected" cost inflation. Sainsbury has delivered £730m of its ongoing £1.3bn cost saving programme.

Retail free cash flow of £759m was up 37%, as the group saw more normalised cash flow patterns compared to the pandemic related disruption last year. Net debt, including lease liabilities, fell £180m to £6.2bn.

The group continues to expect underlying profit before tax of £630-£690m, with retail free cash flow of at least £500m.

An interim dividend of 3.9p per share was announced, up 22%.

The shares rose 2.1% following the announcement.

View the latest Sainsbury share price and how to deal

Our view

Management have made it clear consumers are tightening their purse strings. Shopping around for deals and heading for own label brands are evolving themes amid the current cost of living crisis.

That puts added emphasis on grocers offering value, and that's exactly what Sainsbury's is focusing on. 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.

To be fair, the relentless focus on price is working. Compared to key competitors like Tesco, Asda and Morrisons, Sainsbury is the only one to grow volume share since pre-pandemic times. Offering value doesn't come cheap, though, and it's having a real impact on the profit line.

Cost pressures are also in the mix, and over the first half prices rose more in line with the wider market than they did last year. 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 - for now that tactic looks to be working.

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, with a range of fixed cost reductions already implemented. This is really a key programme to help with rising costs, continued progress is key.

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. Profit guidance has already been downgraded once this year, so it's something to be wary of.

Sainsbury is especially exposed to General Merchandise, with its ownership of Argos. Sales have been declining over recent quarters, a result of changing shopping habits and lack of stock. There could be a slither of hope though, with sales growing in the second half of the year. Stock levels are back, and Argos at least looks ready for the upcoming Christmas period. The real test is whether demand is still there given the cost-of-living crisis, 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. That gives more breathing room while the integration of Argos stores continues. Along with the expected £500m or more of 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 and the upcoming Christmas trading period will be a key barometer for demand. Competition is fierce at the bottom end of the value chain though, and the lower-than-average valuation reflects the uncertain demand environment.

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
Matt Britzman
Equity Analyst

Matt is an Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors.

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Article history
Published: 3rd November 2022