Supermarket group J Sainsbury (LSE: SBRY) saw its share price fall when markets opened, despite reporting a “record Christmas”. And despite rising a little during the morning, they remain down as I write.
Key facts
Chief executive Simon Roberts said that customers shopped early for Christmas last year, “buying Christmas treats and fizz more than once”. Champagne and prosecco sales hit record levels, apparently, as people hosted large gatherings at home once again.
Non-food sales such as through the group’s Argos brand were also strong — Mr Roberts said tech and appliances did particularly well, helped by the football World Cup.
Overall, Sainsbury’s retail sales for the six weeks to 7 January were 7.1% higher than the previous year.
Management now expects underlying pre-tax profit for the year to March to be at the upper end of forecasts. That suggests a figure of at least £660m, in my view. That’s good news, but it’s worth remembering that the comparable figure for last year was £730m.
Even so, I’m confident that Sainsbury’s dividend should be safe this year, giving the stock a useful forecast yield of 5.2%.
Why did the shares fall?
Most companies are reporting higher revenue at the moment. There’s a good reason for that. The impact of inflation means that prices for most goods have risen over the last year. Sainsbury’s sales growth doesn’t necessarily mean that customers are buying more items.
The company doesn’t reveal its sales volumes, but management did say today that volumes were “resilient” during the final quarter of last year. Given the brand’s mid-market positioning, my guess is that volumes were probably fairly flat.
Profit margins are another concern for me. The company said it expects to have absorbed £550m of cost increases this year, in order to limit customer price rises. Some of this is being offset by cost savings. But my feeling is that rising costs will mean profit margins have probably fallen slightly.
Market conditions don’t seem likely to get any easier in 2023 either. Customers are facing Christmas bills and we may see higher energy prices from April when the current government support scheme ends.
Sainsbury’s shares have now risen by 40% from the lows seen in October. My guess is that traders have been taking profits today, locking in gains ahead of a difficult year.
Should investors buy?
The strong share price performance we’ve seen over the last few months has left Sainsbury’s shares trading on a price-to-earnings (P/E) ratio of 12, with a forecast yield of 5.2%.
In my view, that’s probably high enough. This business appears to be performing well. But the reality is that it’s a mature business with low profit margins in a competitive sector.
Profits are expected to fall slightly this year before staging a modest recovery in 2024. But I just don’t see much growth potential here.
Of course, Sainsbury’s could surprise me by outperforming its rivals. There’s also the (small) possibility of a takeover bid. Rival Morrisons was taken private last year, after all.
I think this stock has some attractions as an income share, but I’d probably wait for a market dip before buying.
