First-half underlying sales, excluding fuel and the discontinued Argos operations, rose by 2.6% to £14.0bn. Grocery sales increased 2.9%, partly offset by a 3.4% decline in General Merchandise & Clothing.
Underlying operating profit rose 3.6% to £525mn (as expected), slightly ahead of sales as the company benefitted from volume growth and continued cost savings.
Free cash flow rose by £57mn to £333mn. Net debt, including lease liabilities, increased by £0.1bn to £5.6bn.
The bottom end of its full-year profit guidance has been raised. Excluding Argos, underlying operating profit is now expected to land between £1,025-1,065mn (previously £965-1,065mn). Free cash flow still expected at over £500mn.
The group has completed £200mn of its £300mn share buyback programme, with the remainder to be completed in the second half. The interim dividend was unchanged at 4.1p per share.
The shares were down 4.0% in early trading.
Our view
Sainsbury’s first-half sales came in a touch lighter than expected, as softer price growth took the shine off continued market share gains. But tight cost controls meant profits grew faster than sales, allowing the group to raise the bottom end of its full-year profit guidance. With the upgrade only matching what markets were already expecting, and no new share buyback announced, the shares fell in early trading.
The Argos sale remains on track for February 2027. Letting it go should create a simpler company with more predictable profits, as well as freeing up management time and allowing more investment to be directed towards grocery. The deal won’t transform profits overnight, but it should improve the quality of the investment case.
That food business continues to gain market share, helped by better products, competitive prices and more innovation. ALDI Price Match and Nectar Prices have been expanded across more products and are helping to keep customers loyal. More shoppers are doing their weekly shop at Sainsbury's too, an important sign that its offer is resonating beyond occasional top-up visits.
Sainsbury’s is choosing not to pass on every cost increase to shoppers because keeping prices competitive matters in a market where customers can switch easily. That is good for the long-term health of the brand, while progress on cost savings is helping to protect margins in the meantime.
Investment in stores adds some pressure, but it should support future sales by improving availability, layouts and the overall shopping experience. Management has shown it can balance these investments with tight control of day-to-day costs, with the midpoint of upgraded full-year guidance now pointing to a small rise in profits.
Sainsbury’s is also becoming less exposed to areas where demand can swing sharply when household budgets are squeezed. That should make future performance easier to understand and reduce some of the risk around forecasts. Grocery is still highly competitive, though, and rivals will keep investing in price, quality and convenience.
The balance sheet is in good shape and free cash flow remains strong. The sale proceeds from Argos are expected to be absorbed by separation costs rather than fund any extra share buybacks. Still, there’s good support for the prospective 4.1% dividend yield, but no returns are guaranteed.
Overall, the sale sharpens the focus on what Sainsbury’s does best and removes a business that has been a source of uneven performance. We view that positively, but much of the progress in food is already reflected in a valuation above its long-term average. With competition intense and costs still rising, the current valuation looks about right to us.
Environmental, social and governance (ESG) risk
The retail industry is low/medium in terms of ESG risk but varies by subsector. Online retailers are the most exposed, as are companies based in the Asia-Pacific region. The growing demand for transparency and accountability means human rights and environmental risks within supply chains have become a key risk driver. The quality and safety of products as well as their impact on society and the environment are also important considerations.
According to Sustainalytics, Sainsbury’s management of ESG risks is strong.
An area of strength is the fact that the group’s executive pay is explicitly linked to ESG performance targets. However, within that, the group’s ESG disclosures aren’t in accordance with leading reporting standards, in particular the environmental policy is weak. This is significant given the group’s extensive packaging and freight usage. The group’s large scale puts it at increased risk of scrutiny when it comes to product reputation, and is something to monitor as customer appetites lean more towards sustainable options.
J Sainsbury key facts
All ratios are sourced from LSEG Datastream, based on previous day’s closing values. 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 LSEG. 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.