Sainsbury's has super Christmas but is it enough?

Shares in the UK's second largest supermarket had just rallied strongly to a nine-month high but fell following these Christmas results. Our head of markets runs through the important numbers. 

There is much to like within these third-quarter numbers, with Sainsbury (J) (LSE:SBRY) reaping the benefits of a bumper Christmas period. Given ever intensifying competition, however, there also remains much to do.

The festive period overall was a record for the group, with Christmas sales up by 7.1%. Underlying this significant improvements were rises of 7.4% from General Merchandise, 7.1% from Grocery and 5.1% from Clothing.

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Argos also made a notable contribution after some quarters of relative underperformance, especially in the period up to Christmas. This goes some way to vindicating the group decision to move Argos into Sainsbury's stores, with some spontaneous festive purchases made by consumers while visiting for a larger grocery shop.

Sales for the quarter at Argos rose by 4.5%, and over Christmas by 7.1%. Availability of stock and delivery choices also helped and, in a sign of the times, there was a notable increase in shoppers purchasing energy saving items such as air dryers and heated laundry airers.

Sainsbury’s more recent focus on returning to its knitting in terms of Grocery sales is clearly having an impact. Its investment in keeping costs low, which will run to £550 million by March, is hitting back at the discounters, with the Aldi Price Match campaign now being extended to cover around 300 products. For the 16 weeks to 7 January, like-for-like sales increased by 5.6% and, perhaps more tellingly, by 12.5% as compared to pre-pandemic levels.

The group’s strategy of containing cost inflation, and where possible passing on unavoidable increases by as little as possible and after some of the competition has bolted, is also reinforcing its value brand. Sainsbury's was clearly well prepared for the run-up to Christmas, with availability and satisfaction scores increasing as the twin boosts of the football World Cup and the festive season added to sales.

The improved performance has also resulted in an increase to the free cash flow number, which is expected to rise from £500 million to £600 million. In the meantime, the dividend remains well-covered with a yield of 5.6% which is a clear investment attraction for the stock.

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At the same time, Sainsbury's has guided that the full-year underlying pre-tax profit will be towards the upper end of the £630 million to £690 million range previously advised. This would nonetheless be a decline from the previous year’s showing of £730 million and underlines the scale of the challenges which show few signs of abating.

Indeed, grocery aside, there some other metrics which highlight how the landscape is changing. Despite improved showings over the last quarter, compared to pre-pandemic levels total General Merchandise sales declined by 6.9% (at Argos by 5%), with Clothing also showing a marginal dip. With an increasingly pressing economic environment which will test the mettle of consumers and supermarkets alike in terms of costs, the challenges are stark.

It remains to be seen whether Sainsbury's is turning a corner, with the shares having rallied by 42% over the last three months, although this hike is not enough to offset a decline in the price of 12% over the last year, as compared to an increase of 2.7% for the wider FTSE100 index.

The market consensus of the shares has recently deteriorated to a 'sell', with Tesco (LSE:TSCO) remaining the preferred play, although this could be subject to upgrades given the general success of the latest quarter.