Sainsbury’s first-quarter sales rose 2.7% to £9.2bn, excluding fuel, which was in line with market expectations. Growth was driven entirely by a 3.6% uplift in Grocery sales as the group gained market share from competitors.
General Merchandise and Clothing sales declined 3.7% (-1.3% expected) in the period due to a soft clothing market and reduced in-store space allocation in favour of Groceries. Argos sales fell 0.5% (-3.7% expected), as an uplift in Home & Toys and fan sales partly offset an unfavourable shift in product mix towards lower-priced items.
Full-year guidance was maintained, with underlying operating profit expected to land in the £975-1,075mn range. Retail free cash flows are still expected to exceed £500mn.
The shares rose 1.0% in early trading.
Our view
Sainsbury’s had a decent start to the year, with first-quarter numbers landing broadly in line with expectations. Progress across the business was mixed though, with grocery sales continuing to outperform the broader market, offsetting declines in general merchandise, clothing, and Argos.
Sainsbury's continues to gain market share, thanks to its herculean effort to improve products, value perception and innovation more generally. Things like its market-leading ALDI price match and Nectar prices are helping on this front too. They’ve been expanded across more products than ever before and are doing a great job at keeping customers loyal.
However, Sainsbury’s is more exposed to general merchandise than its peers through its ownership of Argos. Tough competition and subdued consumer spending have seen an unfavourable trend towards lower-priced items. We’re starting to see the benefits of softer comparable periods and improving profitability, but the space is likely to remain challenging for some time.
The top-line growth and efficiency improvements have been enough to offset rising national insurance and minimum wage costs. But rather than pass through the full extent of cost inflation to customers, Sainsbury’s has absorbed some of these additional costs to keep its prices low and competitive. Alongside investment in its stores, retail profits are getting squeezed.
Looking ahead, the conflict in the Middle East remains a headwind for costs and consumer demand. While tensions in the region are easing, inflation could still trend higher from here, and the more discretionary items that Argos sells are especially at risk in this scenario. As a result, the full-year outlook is understandably cautious, with the midpoint of guidance pointing to flat profits this year.
The balance sheet ended last year in good shape, with debt metrics towards the lower end of the group’s target range. Alongside strong free cash flows, there’s plenty of weight behind the group’s prospective 4.6% dividend yield. But remember, no shareholder returns are guaranteed.
Sainsbury’s deserves credit for its steady strides forward in recent times. That’s been reflected by its valuation climbing above its long-term average, which now looks about right to us. There could be scope to beat profit guidance if the Middle East conflict draws to a close in the near term. But we prefer other names in the sector, given the tough competition and challenges at Argos.
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
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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.
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