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J Sainsbury - strong Christmas but general merchandise lags

Sainsbury's third quarter like-for-like sales, excluding fuel, rose 7.4%. This was led by grocery sales which rose 9.3% in 16 weeks to 6 January...

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Sainsbury's third quarter like-for-like sales, excluding fuel, rose 7.4%. This was led by grocery sales which rose 9.3% in 16 weeks to 6 January. Within that, Christmas sales were up 8.6%. Growth was helped by higher volumes as inflation slowed. The Nectar Prices initiative also boosted festive sales.

Total General Merchandise sales, including Argos, fell 0.6%, while Clothing dropped 1.7%. The group said these areas of the market are seeing heavy discounting.

The group still expects full year underlying profit before tax between £670mn - £700mn. Grocery is expected to offset weakness elsewhere.

The shares fell 4.5% following the announcement.

View the latest Sainsbury's share price and how to deal

Our view

Sainsbury's has put in a resilient showing. Christmas trading was especially positive.

Nectar prices and a big push on product improvement have helped Sainsbury's seize market share. This has happened faster and more effectively than we'd feared. 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.

The lack of an upgrade following the festive trading period has left the market disappointed. The disappointing momentum here is because Sainsbury's is especially exposed to General Merchandise, with its ownership of Argos. 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.

Performance for the rest of the year will rest on the scope of the economic slowdown. While recent strides have been impressive at the supermarket, we can't rule out margin pressure as competition in the sector remains elevated.

The balance sheet is in better condition, with the group hitting its four-year £950mn net debt reduction target a year ahead of schedule. Along with the £600mn+ 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's. 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's 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: 10th January 2024