Investors respond to Sainsbury's 'biggest ever Christmas'

Christmas was clearly a festive time for the retailers and supermarkets, and Sainsbury (J) (LSE:SBRY) no exception.

Share price reactions to the updates so far have been decidedly mixed, with investors choosing for some to ignore the success of the Christmas period and focus heavily on the undoubtedly challenging times to come. Indeed, the weakness of the Sainsbury's price at the open comes despite a drop of 4% in the previous session as a read across from the drubbing given to the likes of Tesco (LSE:TSCO) and Marks & Spencer Group (LSE:MKS) in particular.

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Within the supermarket sector, where prices are central to success, remaining competitive comes at a cost. For Sainsbury's, the investment in lowering prices over recent times will come under additional pressure, especially following the outcome of the measures announced in the Budget. Even so, the recently announced rise in UK food inflation should allow some of the larger players to pass on some of those costs.

In the meantime, the availability of discounts came into their own over the festive period, bolstered by seasonal offers which underpinned the sales growth. The company estimates, for example, that it grew volumes in its “Taste the Difference” lines by 16% over the quarter, while sales of party food jumped by an impressive 40%. At the same time, the launch of its “Aldi Price Match” at convenience stores in November has also helped to underpin both profile and progress.

With customers searching for perceived and actual value, the availability of the group’s Nectar scheme also played a major part in increasing Sainsbury’s market share over the period. Indeed, the company estimates that within three years, Nectar will provide incremental profit of £100 million which would be a significant bonus given the ferocity of competition which the sector attracts.

Sales numbers were strong, if a little light compared to the previous year. Total sales grew by 2.7% in the 16 weeks to 4 January, underpinned by a strong showing in Grocery where an improvement of 3.8% over the six Christmas weeks helped bolster growth in the third quarter to 4.1%.

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However, the laser focus as the company returns to its knitting in grocery is not being mirrored in other parts of the group. General Merchandise and Clothing sales dipped by 0.1% over the quarter, although there was a 3.4% spike over Christmas. There have been warning signs over the last few months that the consumer is becoming increasingly selective in non-essential items which, coupled with other competitors specifically concentrated in this space, has somewhat left Sainsbury's trailing and with potentially more to follow.

The situation at Argos, meanwhile, is more nuanced. Sales were down by 1.4% in the quarter although up by 1.1% over Christmas. The group has highlighted that although the brand performed strongly over the festive and Black Friday events, this was more than offset by the subdued performance outside of those times. The sale of consumer electronics outside of promotional activities remains one which is proving more difficult to sustain, especially given the wider pressures which customers are facing.

In terms of outlook, Sainsbury's has maintained its guidance for underlying operating profit to land somewhere in the middle of its £1 billion to £1.1 billion range, which it estimates would equate to around 7% growth. Meanwhile, the group is expecting retail free cash flow to come in at a healthy £500 million, with its cost saving target of £1 billion by 2027 remaining on track. 

This should be enough to ensure that a generous dividend yield of 5% is maintained, representing an attraction for income-seeking investors, while the previous buyback programme could yet be extended in due course.

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The weakness in the price in early trade adds to what has been a difficult time of late, with the shares having fallen by 14% over the last year, as compared to a gain of 8.7% for the wider FTSE100. In turn, leaves the shares down by some 4% over the last three years, which is a tepid return.

By the same token it also leaves Sainsbury's on an undemanding valuation and while the group is far from snatching Tesco’s crown as the preferred play in the sector, the progress it has been able to achieve leaves the market consensus at a buy on prospects.