Sainsbury's looks to 'value' proposition

The latest food inflation figures from the British Retail Consortium and NielsenIQ confirmed what hard-pressed consumers already knew. Prices keep going up at the tills. Food price inflation rose to a record high of 11.6 per cent in October, up from September’s 10.6 per cent. NielsenIQ’s head of retailer and business insight Mike Watkins said that “with pressure growing on discretionary spend across both non-food and food retail, delivering good value is the table stake in the battle for shopper loyalty”. J Sainsbury (SBRY) has tried to position itself as a relative value option for shoppers in the battle for custom, with price rises implemented at a rate below that of competitors.

A £500mn investment in the value proposition is part of the story behind the first-half reduction in profits, which includes a 9 per cent downturn in retail operating profit. Grocery and general merchandise volumes were down against challenging pandemic comparatives, and “higher-than-expected operating cost inflation” clearly didn’t help.

Like-for-like (non-fuel) sales fell by 1 per cent despite 4 per cent growth in the second quarter, with Sainsbury's having to rely on a 40 per cent increase in fuel sales to drive the overall uplift in revenue. Grocery sales of £11.3bn nudged up only very slightly, but were encouragingly 9 per cent higher than pre-pandemic levels. In other good news, retail free cash flow was up by 37 per cent to £759mn and the company stuck with its guidance of hitting at least £500mn for the year. 

Wealth Club head of equities Charlie Huggins said the company, situated between premium competitors like Ocado (OCDO) and budget options like Aldi and Lidl, “isn’t perceived as the cheapest or the best” and “with the economy being strangled by higher interest rates and inflation, Sainsbury’s will have to run very hard just to stand still”.

Be that as it may, the company maintained its full-year underlying pre-tax profit guidance, good news at a time when the market is taking no pity on stocks which miss earnings forecasts, at a range of £630mn-£690mn. This contributed to a 6 per cent mark-up in the shares on results day. And the valuation is undemanding, with the shares trading at 10 times forward earnings according to the consensus analyst position on FactSet, below the five-year average of 12 times. Hold.

Last IC View: Hold, 232p, 29 Apr 2022