The Sainsbury’s share price falls after a huge loss. But I see value in SBRY

Despite grocery sales leaping by 8%, the Sainsbury’s share price fell on Wednesday. But I expect bumper profits from the supermarket after Covid-19 ends.

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This morning, J Sainsbury (LSE: SBRY) released its preliminary results for the 52 weeks ending 6 March. After an opening bounce, the Sainsbury’s share price fell back as investors digested these latest figures.

Sales leapt by nearly 8%

Despite there being some good news in these results, the Sainsbury’s share price soon headed south. But first, the good news: total retail sales rose by 7.3% (including VAT, but excluding fuel). Grocery sales were up a healthy 7.8% and General Merchandise sales rose 8.3%. Even better, digital sales skyrocketed due to lockdowns, more than doubling (+102%) to £12.1bn and reaching three-sevenths (42%) of total sales.

Sainsbury’s suffers from Covid-19

Unfortunately, Sainsbury’s pumped-up sales failed to translate into higher profits. In fact, the business slumped to a huge loss in 2020/21. Underlying pre-tax profit was £356m, down almost two-fifths (39%). This came after the supermarket repaid £410m of business rates relief. However, the group also incurred a whopping £485m of additional costs in adapting to the Covid-19 pandemic. Obviously, this isn’t great news for the Sainsbury’s share price.

However, the real damage to profits was done by one-off exceptional charges totalling £617m. This figure includes £423m of costs following the closure of over 400 standalone Argos stores. As a result of these ‘unexpected items in the bagging area’, Sainsbury’s made a full-year loss of £261m. Hence, at Wednesday’s open, the Sainsbury’s share price initially leapt to 250p, up 7.9p (3.3%). But, as I write near noon, the shares have dropped back to 236.7p, down 5.4p (2.2%).

I see value in the Sainsbury’s share price

At 236.7p as I write, the share price has rebounded well (+37.4%) from its 52-week low of 172.32p on 1 September 2020. But it’s still 26.7p (10.1%) below the recent high of 263.4p on 27 January, although it’s up almost a quarter (21.4%) on exactly a year ago. Also, the company held its full-year dividend at 10.6p, which equates to a dividend yield of 4.5% a year. That’s a whole percentage point higher than the FTSE 100‘s dividend yield.

Sainsbury’s has been trading since 1869. It has a market value of £5.4bn and is the UK’s second-largest grocer, with a market share of nearly a sixth (15.9%). Its major brands also include Argos, Habitat, Tu, Nectar and Sainsbury’s Bank. But to see value in the current Sainsbury’s share price, I have to look beyond these depressed results and into the future. The grocer expects underlying pre-tax profit in the current 2021/22 financial year of £620m, 5.8% ahead of the £586m it made in 2019/20. That’s a plus.

I’d buy at the current level

Nevertheless, Sainsbury’s competes in a cut-throat market, squeezed by market leader Tesco on one side and German discounters Aldi and Lidl on the other. Its market share has been falling, like the Sainsbury’s share price. It has cut prices (and profits) by introducing its Aldi Price Match on over 250 items. A further 2,500 everyday items have been on Price Lock since January. But the number of Nectar card users has surged to 7.4m from 4.5m last year, up almost two-thirds (64.4%). Also, the group has teamed up with Deliveroo and Uber to deliver in 37 cities and towns.

On balance, I see fair value in the current Sainsbury’s share price. Hence, I’d be a cautious –but optimistic — buyer at the current share price of just over 236.7p!

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Cliffdarcy has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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