Sainsbury’s (LSE: SBRY) is charging higher this morning after the company issued a surprisingly upbeat trading statement and outlook.
Shares in the retailer have gained more than 13% at time of writing, taking them to the top of the FTSE 100 leaderboard, after the group said that it now expects underlying profit before tax to be “moderately ahead of published consensus” of £548m.
What’s more, the retailer reported that the rate of decline in its same-store sales improved in the second quarter. Excluding fuel, same-store sales fell 1.1% in the second quarter, marginally better than the 1.3% decline expected by analysts. During the first quarter, Sainsbury’s sales declined by 2.1%.
According to market research firm Kantar Worldpanel, Sainsbury’s robust performance improved towards the end of its financial second quarter. Kantar estimates that Sainsbury’s sales rose 0.9% in the 12 weeks to September 13.
Commenting on the improved trading results, CEO Mike Coupe said:
“During the quarter we saw an improvement in our key trading metrics…Whilst the market is clearly still challenging, with food deflation impacting many categories, we are making good progress on delivering our strategy…Year-to-date we have traded well, with both sales and cost savings ahead of expectations. Should current market trends continue, we expect our full year underlying profit before tax to be moderately ahead of our published consensus.”
Strong performance all round
During Sainsbury’s second quarter, the group experienced strong growth across all of its product lines. According to Mike Coupe, in the quarter both volume and transactions grew as the decline in average basket spend continued to stabilise. Online grocery sales increased 15% during the quarter; clothing sales expanded 13%, and Sainsbury’s Bank saw its best ever month for travel money in July, with a 35% year-on-year increase in transaction volumes.
And if these trends continue, as noted above, Sainsbury’s management expects full-year underlying profit before tax to be moderately ahead of City expectations.
Staging a recovery
Overall, Sainsbury’s second quarter update shows that the company is starting to fight back against the relentless market-share grab of the discounters, Aldi and Lidl.
Aldi and Lidl are continuing to enjoy double digits sales growth, which has dampened City expectations for the “big four” UK retailers, Tesco, Asda, Sainsbury’s and Morrisons. Still, Sainsbury’s surprise announcement that it now expects full-year underlying profit before tax to be moderately ahead of City expectations shows that investors shouldn’t turn their backs on the big four just yet.
This is great news for income investors who bought Sainsbury’s for the company’s 5.8% dividend yield.
Indeed, there had been some concerns in the City that Sainsbury’s would cut its dividend payout again this year, as profits continued to fall. The company cut its final dividend to 8.2p a share, from 12.3p at the beginning of May, a decline of 24%.
However, based on current City forecasts the dividend payout is currently covered twice by earnings per share. With profits stabilising, it looks as if the company’s dividend isn’t going to be cut again any time soon.
Sainsbury’s currently trades at a lowly forward P/E of 10.9, even after today’s gains.
