Growing competition has plagued the profits performance at UK’s established supermarkets in recent times. But signs of a fightback at Sainsbury‘s (LSE:SBRY) has lifted the retailer’s share price northwards on Thursday.
At 276p per share, the FTSE 100 grocer was last trading almost 6% higher on the day. In its half-year update it raised its profits estimates for the financial year as it claimed a rare victory against value operators Aldi and Lidl.
Could now be the time to add Sainsbury’s shares for my portfolio?
On the up
In today’s statement, Sainsbury’s said:
“We’re gaining volume from all of our grocery competitors, have grown ahead of the market throughout the first half and made record market share gains. This is the result of the strategic investment we have made in our food business over the last three years, improving value, innovation and customer service.”
Excluding fuel, like-for-like sales were up 8.4% during the six months to September. Underlying pre-tax profit remained flat at £340m, while statutory pre-tax profit dropped 27% to £275m, reflecting the boost from a legal settlement a year earlier.
Grocery sales rose 10.1% in the first half, while general merchandise sales improved 1.1%, thanks to strong trading at the firm’s Argos unit. Underlying profit before tax for the full year (to March 2024) is now tipped at £670m-£700m, at the higher end of previous guidance. Profits in the previous year came in at £690m.
Sweet Nectar
Today’s update provides a rare crumb of comfort for the firm’s beleaguered shareholders. The Sainsbury’s share price has fallen 30% over the past 10 years as rising competition has eaten into sales and profits. According to Kantar Worldpanel, its market share has dropped almost 2% over the period to 14.8% today.
One reason for the company’s first-half success is the rollout of its ‘Nectar Prices’ programme. Offering special prices to loyalty card members is helping to pull more punters into its stores and onto its website, and the business now has 14m so-called Nectar Digital Collectors. This is an increase of around 3m since April.
Big questions remain
Improved revenues are all well and good. But if this isn’t translating into the profits column then doubts will persist over the long-term investment appeal of Sainsbury’s.
Price cuts were key to the company’s sales rise in the first half. And while the top line jumped, profits still stagnated from the same period in 2022.
The ‘Big Four’ grocers will need to keep slashing prices too, to attract customers as the value chains embark on rapid expansion of their store estates. Therefore earnings might remain under severe pressure (despite the growing popularity of Nectar).
The verdict
J Sainsbury’s trajectory has clearly improved of late. As well as that pickup in turnover, cost-cutting measures are going well and net debt is dropping (down another £701m in the first half, to £5.6bn).
However, the scale of the supermarket’s recovery could prove limited as competitive pressures worsen. I don’t expect Sainsbury’s to deliver impressive earnings (or dividend) growth any time soon, so I’d rather buy other FTSE 100 stocks today.
