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Has Sainsbury been oversold this year?

The squeeze on net margins is set to continue
Has Sainsbury been oversold this year?
  • General merchandise sales under pressure
  • Pressure on household budgets to intensify

Sainsbury’s (SBRY) trading performance in the 16 weeks to 25 June provided one of the clearest indicators yet that households are cutting their budgets, at least regarding non-essential items. The group recorded a 4 per cent decline in like-for-like sales, excluding fuel, over the 16 weeks to 25 June, compared with the same period in 2021. However, an 11.2 per cent fall in general merchandise sales (including Argos) contrasts with a relatively modest 2.4 per cent contraction in grocery sales. Whether this had anything to do with the group’s ‘food first’ strategy is unlikely, as the related simplification of support centre teams in general merchandise and the planned streamlining of supply chain/logistics operations were intended to drive efficiencies.

Sainsbury, in common with other legacy high street grocers, has been implementing cost cuts to its product ranges in a bid to keep pace with the big German discounters, as evidenced by the Aldi Price Match campaign that involves over 240 products, including the top 20 products that customers buy most often.

The group revealed that the re-jigging of the business model has had a positive impact on grocery volume market share performance versus the pre-pandemic level. But the reality is that upward pressure on commodity prices is still squeezing net margins. And some analysts believe that the impact of the disruption to soft commodity markets will not become fully apparent until next spring – a sobering prospect for grocers and consumers alike. Simon Roberts, group chief executive, admitted that “the pressure on household budgets will only intensify over the remainder of the year”, putting further pressure on the group’s general merchandise offering.

There has even been some speculation that Sainsbury might be subject to bid approaches due to a near one-quarter fall in its share price since the start of the year, which compares unfavourably with the likes of Tesco (TSCO) and the FTSE 100 in general.

Chris Beauchamp, chief market analyst at IG Group (IGG), notes that the share price of the grocer held up despite the somewhat downbeat trading update, perhaps indicating that the market “has done enough to price in the expected squeeze on consumer incomes”. With the shares trading at 10 times forecast earnings, effectively 15 per cent adrift of the consensus target, and on an implied dividend yield of 5.8 per cent, he may have a point.

The supermarket group left its full-year forecasts unchanged.   

Last IC view: Hold, 280p, 07 Jul 2021