Sainsburys (SBRY), the UK’s second-largest supermarket group by market share, dished up a surprisingly positive first-half trading update and raised its forecast for full-year earnings and cash-flow.

The shares, which had been drifting towards six-month lows since peaking in May, leapt more than 5% to 275p and lifted with them shares in online grocery delivery firm Ocado (OCDO).

VOLUME GAINS DRIVE UPGRADES

For the six months to 16 September, the group posted total sales including VAT of £18.865 billion, up 2.9% on last year, driven by a 7.7% increase in retail sales excluding fuel to £15.8 billion.

Like-for-like sales excluding fuel were up 6.6% in the second quarter, slower than the first quarter’s 9.8% increase but still ahead of expectations, bringing first half growth to 8.4% which was faster than the 7.8% growth posted by arch-rival rival Tesco (TSCO).

Grocery sales were up 10.1% with volume growth across both quarters ‘driving record market share gains and consistent outperformance’ according to the firm.

‘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. Customers are noticing and they're doing more of their grocery shopping with us’, adds the press release.

Grocery chain Sainsbury’s needs to deliver on earnings and guidance

Retail operating profit rose 2% to £485 million reflecting the volume gains in grocery profit and the continued delivery of benefits from the Save to Invest cost-saving plan, partly offset by the impact of weaker seasonal sales on general merchandise profits.

Retail free cash flow was a better-than-expected £520 million, driven by strong grocery sales and the timing of first-half payments, leading the firm to raise its full-year forecast from ‘at least £500 million’ to ‘at least £600 million’.

Similarly, underlying pre-tax profit of £340 million means Sainsbury’s now expects full-year earnings to be between £670 million and £700 million or the top half of its previous guidance range.

WHAT DO ANALYSTS THINK?

‘Sainsbury’s half-year results highlight the company's continued success, particularly within the grocery sector for which revenue grew by over 10%’, commented Russell Pointon, director of consumer research at Edison.

‘Despite the decline in clothing and fuel sales, which can be attributed to seasonal factors and lower input prices, the company’s ‘food first’ strategy appears to be working, emphasising the importance of good value, high-quality food in the face of cost-of-living pressures and competition from discount grocers like Lidl and Aldi.

‘As we approach the holiday season, there is a hope that the decline in demand for clothing and big-ticket items may see a turnaround.’

‘Sainsbury’s grocery business is motoring, gaining volume week in week out and building market share through a stronger value proposition, good innovation (eg Nectar Prices) and decent service. The core food business looks well set up for Christmas 2023 and beyond’, observed Shore Capital’s head of research Clive Black.

‘If the bank, general merchandise and financing costs had been more positive, we would have been putting through a bigger upgrade’, added Black.

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