Join our community of smart investors

Trading update: Sainsbury's raises cash flow and profit hopes

A strong Christmas season underpinned a bullish trading update
January 11, 2023
  • Raising wages
  • Threat from discounters 

J Sainsbury (SBRY) defied the gloomy rhetoric around consumer spending in its third quarter to 7 January as it raised full-year guidance on the back of a “record Christmas”. The supermarket bumped up its retail free cash flow forecast from £500mn to £600mn for the year to March and said that underlying profit before tax should come in at the upper end of its previously guided range of £630mn to £690mn. But this couldn’t prevent a 2 per cent markdown of the shares, as the market remains wary of the impact of inflation on demand and the growing threat from the grocer’s discounting competitors.

Total retail sales (excluding fuel) rose by 7.1 per cent over the Christmas period against the prior year as shoppers splashed the cash on festivities and delivered record champagne and prosecco sales. Revenue was up by 5.2 per cent overall in the quarter. This was driven by price increases in an inflationary food environment - UK food inflation hit 13.3 per cent in December, according to the British Retail Consortium - albeit Sainsbury’s has raised prices at a lower rate than the wider market.

General merchandise sales were up by 5 per cent in the period, as Argos gained market share and technology and household product sales performed strongly. But they were down by 7 per cent on a three-year basis, which presents the business with a headache. 

The profit guidance uplift came despite the confirmation earlier this month that the company would spend £185mn more on pay and benefits. This includes an increase in February in the salary base rate for retail staff, which will rise to £11 an hour nationally and £11.95 in London.   

Wealth Club head of equities Charlie Huggins said that despite the strong Christmas performance, Sainsbury’s “simply can’t compete with the prices of Aldi and Lidl”.

This price threat is real. The German discounters each boosted sales by around a quarter over Christmas and have significantly increased their UK market share over the past five years. While Sainsbury’s competitive pricing approach has had some success, the growing popularity of Aldi and Lidl remains a key risk as consumers continue to trade down and look for cheaper alternatives as bills rise and wage growth fails to keep up.

Sainsbury’s valuation remains attractive, despite it having become more expensive since last autumn. The shares trade at 12 times forward earnings, according to FactSet, which sits at the five-year average. While this is higher than the 10 times forward valuation in November, this rating is still undemanding given the company's performance and outlook. Hold.  

Last IC View: Hold, 207p, 03 Nov 2022