- Investment in prices drives food sales
- Earnings fall as a result of competitive push
- Full year profit target confirmed
Supermarket group Sainsburys (SBRY) was the biggest gainer in the FTSE 100, bucking a weak market backdrop, in spite of posting a fall in reported profits for the first half.
The shares added 5 % to 208p, continuing their strong run and bringing their gains for the last month to more than 20%.
WHY WERE PROFITS DOWN?
Total retail sales excluding fuel for the six months to mid-September were up 5.9% driven by a 9.3% increase in grocery revenues, but like-for-like sales for the same period were down 0.8%.
Although there was an overall improvement between the first and second quarters, sales of non-food items in Sainsburys stores were down 14.5% for the first half while Argos sales were down 2.9% (on a like-for-like basis, those figures would look worse still).
The firm was able to drive food sales by raising prices slower than its competitors, having decided to ‘invest’ - or to put it another way sacrifice - £500 million of profits over two years in order to protect its market share.
This has come at a cost, however, with retail operating profits falling 9% during the half and underlying pre-tax profits falling 8% to £340 million.
Chief executive Simon Roberts defended the strategy, claiming Sainsburys was the only one of the big four full-choice supermarkets to have grown its market share in volume terms since the pandemic and has ‘never been better value’ for shoppers.
However, data from Kantar Worldpanel shows that in value terms Sainsburys’ share of the UK grocery market stood at 14.7% in the 12 weeks to 2 October compared with 15.3% in the 12 weeks to 22 March 2020 whereas over the same period Tesco increased its market share from 26.8% to 27%.
WHY ARE THE SHARES UP?
Aside from claims over market share, the stock rallied on relief management stuck to its underlying pre-tax profit guidance of between £630 million and £690 million for the year to March 2023.
Clive Black, vice chairman and head of consumer research at Shore Capital, said Sainsbury had ‘executed well amidst distorting comparatives, cost headwinds and poor consumer sentiment’, and called the confirmation of the full-year target ‘especially welcome’.
Black argues the grocer is ‘doing well on what it can control’ and believes there will be ‘an inflexion point for material capital appreciation’ in the shares.
