Sainsbury’s makes progress and yields 7%

There's a sense that the supermarket sector's big players are running just to stand still. Our head of markets jogs through the highlights of half-year results from Sainsbury's.

After a weak first quarter, Sainsbury (J) (LSE:SBRY) has seen something of a resurgence in the second, lifting the half-year performance as a whole to more comfortable levels.

Against strong comparatives from the previous year, sales numbers declined in all categories in the first quarter. Since then, and as comparatives begin to ease, there was positive sales growth driven by a second-quarter performance which saw Grocery sales up by 3.8%, General Merchandise by 1.2% and Argos by 1.6%. The Clothing unit remained in the red, although a sales decline of 0.2% signalled an improvement from the 10.1% drop in the first quarter.

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Fuel sales increased by a significant 39.5%, contributing to an overall revenue increase of 4.4%. More broadly, net debt was reduced by 2.8% in the period to now stand at £6.2 billion, while net funds and retail cash flow in particular boosted the financial position.

The increase in retail cash flow to £759 million represented an increase of 37% and is a contributory factor to another increase to the dividend. The projected yield is now 7%, which is of particular interest to income-seeking investors in the current rate environment, even if some of the boost is due to a weakening share price.

The supermarket sector is one where companies find that there is often much running just to keep still. Against fierce competition on price, particularly at a time when the cost-conscious consumer is prepared to shop around, a recent survey suggested that Sainsbury’s market share had declined once more to 14.7% from a previous 14.9% (which itself was a drop from 15.2%).

The group is painfully aware of the simplicity of a lower price offering being more likely to yield results and, by the end of March next year, expects to have invested £500 million in containing shelf prices, largely through its own focus on cost reduction internally.

To some extent, therein lies the rub. Battling against general cost inflation is a constant challenge, although Sainsbury has attempted to raise its shelf prices where there are no alternatives, by a lower amount and after its competitors have bolted. As evidenced by the latest quarterly performance, this is having some effect, with the group stating that this stronger momentum has spilled over into the beginning of the second half of the year.

Full-year profit guidance remains unchanged, however, at between £630 and £690 million, which would be below the previous year’s showing of £730 million, underlining the pressure on the group despite its strategic measures.

In the meantime, pre-tax profit for the half-year declined by 29% to £376 million compared to a year previous, where the surge in fuel income was unable to offset the pervasive effects of higher operating costs, the group’s “investment in value” and mixed sales numbers for the period despite the second quarter improvement. 

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More positively perhaps, the Grocery part of the business which is receiving particular care and attention saw sales rise by 0.2% over the half-year, but by 9.3% compared to pre-pandemic levels. This indicates signs of progress which are hard-won indeed in the current environment, even amid a changing backdrop where, previously boosted by online growth, customers have been returning to stores in some numbers.

This is a promising update and, from an investment perspective, the positive momentum needs to be maintained to initiate a change of heart towards Sainsbury. The share price has declined by 33% over the last year as compared to a dip of 1.5% for the wider FTSE 100 and Tesco (LSE:TSCO) remains the preferred play.

Even so, if the latest rate of progress can be maintained, it may be that investors could be tempted away from sitting on the fence, where the market consensus of the shares as a hold has been in place for some time.