Shares in Sainsbury’s (SBRY), the UK’s second-largest supermarket by market share, were marked up 2.5% to 286p after the firm increased its profit guidance for the year to March thanks to a stronger than expected performance in the third quarter and over Christmas in particular.
The company is one year into its three-year plan to increase market share through more competitive pricing, which paid off handsomely in the most recent trading period with grocery sales up 0.8% in the six weeks to 8 January compared with 2020 and up 7.7% compared with 2019 before the pandemic.
GAINING SHARE
As chief executive Simon Roberts put it, the firm ‘went big’ on value, new products and staffing levels in the run-up to Christmas with a particular focus on keeping prices down on ‘centre of plate’ items.
Its Aldi price-match campaign, which covers 150 key items - of which 90% are fresh rather than ambient or frozen - combined with the introduction of ‘Nectar prices’, mirroring Tesco’s (TSCO) Clubcard prices offer, saw it take market share with more customers shopping more regularly at its stores for groceries.
General merchandise and clothing sales were less buoyant, down 10.4% on the third quarter of 2020 and 8.3% on the same quarter of 2019 due to the ‘exceptional’ performance of Argos a year ago, although the firm also reduced its promotional activity.
POSITIVE TAILWINDS
Roberts admitted the grocery market had benefitted from several favourable trends during the quarter which he didn’t expect to recur this year.
To begin with, more people were dining at home than eating out compared with last year, due to the Omicron variant, and many customers ordered early due to fears over product availability after the well-documented shortage of delivery drivers.
There was also a sudden late surge in shopping for fresh food in the days immediately before Christmas as shoppers waited to see if they would be able to celebrate with their families or not.
Also, fuel sales jumped 48% due to higher prices at the pump, a return to more normal traffic volumes compared with a year ago and an increase in market share.
TRADING UP
The firm’s continued investment in its ‘Taste The Difference’ range, with 100 new products launched for Christmas alone, was also a success as customers opted to treat themselves.
Champagne and sparkling wine sales hit a record over Christmas and the New Year, and the ‘Taste The Difference’ range was the firm’s fastest growing product tier during the quarter with sales up 13% compared with the same period in 2019.
Roberts maintains that getting prices right on ‘centre of plate’ products encourages shoppers to spend more with them, and the fact ‘Taste The Difference’ is the leading premium supermarket brand would seem to back that view.
INCREASED GUIDANCE
After its better than expected third-quarter performance, the firm raised its forecast for underlying pre-tax profits for the year to March from £660 million to at least £720 million.
The bulk of the increase, £50 million, is due purely to the volume-driven increase in revenues generated during the quarter, with another £10 million coming from Sainsbury’s Bank which is now expecting lower provisions and lower bad debts than previously.
Clive Black, head of research at Shore Capital, called the update ‘surprisingly positive’, especially as the company closed its stores on Boxing Day unlike many of its competitors, and highlighted that the firm’s debt reduction target is ahead of schedule thanks to its higher cash-flow generation during the quarter, which could mean a re-rating for the shares.
He also hinted at the potential for higher capital returns, observing ‘lower leverage in a capital-disciplined business, which is more sustainably competitive, in an industry where the market is growing ahead of new capacity, means the potential for more shareholder friendliness sooner rather than later’.
