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Sainsbury - sales lower, guidance unchanged

Like-for-like sales, excluding fuel, fell 4.0% over the first quarter.

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Like-for-like sales, excluding fuel, fell 4.0% over the first quarter. That reflected a drop in Grocery sales, as the group lapped heightened demand in the same period last year, and an expected decline from General Merchandise and Clothing.

The group continues to expect full year underlying profit before tax between £630m-£690m.

Simon Roberts, CEO, said: "Our customers are watching every penny and every pound" and expects "the pressure on household budgets will only intensify over the remainder of the year".

The shares rose 3.0% 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 emerging 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, and offer its strongest value proposition in years.

Cost pressures are mounting though, and in the last quarter we saw prices rise more in line with the wider market than we have for some time. 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.

One of the risks with keeping prices low is there's less wiggle room if volumes fall. Operating profit margin is expected to drop a touch this year to 3.2%, lower than some peers. 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.

General Merchandise sales remain subdued and it's hard to see a budding recovery coming anytime soon. Discretionary items tend to be some of the first to leave shopping lists when wallets shrink. Sainsbury's is especially exposed to this market thanks to the acquisition of Argos. Nonetheless, some of the lingering issues look to be easing. Availability of stock, which has impacted the ability to meet demand, looks to be showing signs of improvement.

We can't knock progress, especially because 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. It also adds some weight behind the not-insignificant prospective yield of 5.9%, which looks set to be covered by free cash flow. Remember, no dividend is guaranteed.

We continue to be pleased with the direction of travel at Sainsbury. Competition is fierce at the bottom end of the value chain though, and the lower-than-average valuation reflects the not insignificant challenges ahead.

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.

First Quarter Trading Statement

Grocery sales fell 2.4% compared to last year's elevated demand, but remained 8.7% ahead of pre-pandemic levels. The group increased value market share and is increasing its prices later than competitors. £500m is due to be invested over the next 2 years to keep prices low. Jubilee week provided a boost to sales, with taste the difference sales up 12% over the week and alcohol selling well.

General Merchandise sales were down 11.2%, reflecting declines in both standalone Argos stores and those integrated into Sainsbury supermarkets. Quarter-on-quarter sales declines were less severe as stock availably improved. A further 6 Argos standalone stores were shut, with 5 opened inside Sainsbury supermarkets - taking the total to 405.

Clothing sales fell 10.1% from the previous year where competitors were closed. Sales remain 3.9% ahead of pre-pandemic levels, with holiday wear performing well as travel increased.

The group's growing unsecured lending in Financial Services and travel money volumes are recovering faster than expected.

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
Senior 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: 5th July 2022