Sainsbury's first-quarter retail sales rose 9.8%, excluding fuel. This largely reflects an 11% increase in Grocery, as the group's efforts to keep prices low and improve its product offering saw volumes increase. Sainsbury highlighted the popularity of its value brands - with entry price points as the fastest growing product tier. Higher-end Taste the Difference products also did well. Events including Easter and the Coronation boosted performance.
General Merchandise also rose, but at a slower rate than Grocery. Growth was driven by Argos, which has improved its stock availability and this offset declines in-store. Clothing sales fell 3.7%, partly reflecting cooler weather. Financial Services is performing "in line with expectations".
The group highlighted that food inflation is starting to fall and full-year expectations are unchanged, including underlying pre-tax profit of £640m - £700m.
The shares fell 1.6% following the announcement.
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Our view
Sainsbury's progress shouldn't be knocked. As the cost-of-living crisis rumbles on, Sainsbury is throwing a lot at becoming better value, and this appears to be bearing fruit. Efforts have included extensive Aldi price match campaigns, and the launch of 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.
While the value-led strategy has paid off, offering value doesn't come cheap. Profits have been dented by this decision. 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 normalise. We're cautiously optimistic that the worst of this is unwinding, not least because volumes are starting to pick up - 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. Demand at Argos is faring better than general merch in Sainsbury's stores, but 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 and tablemats can wait.
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
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