Sainsbury’s Q1 sales boom justifies share price rally

Shares are up 16% in a month, and these results demonstrate why. Our head of markets reports.

The pandemic has not been a guaranteed slam-dunk for the supermarkets as many assume, but, if managed correctly, the benefits can be significant as Sainsbury's (LSE:SBRY) has shown in this update.

The changes in consumer behaviour have been of particular benefit to Sainsbury’s in online sales, where the group had a strong established presence. Grocery sales online surged by 87% during the first quarter of its financial year, with the click and collect service also enjoying a 13-fold increase. 

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At the same time Argos, which became an online-only retailer for the period, continued to make its contribution.

Increased sales of 10.7% in the 16 weeks to 27 June 2020 were driven by demand for garden goods, PCs, gaming, and home office furniture among others.

These were also fulfilled by the click and collect presence of stores where there is either an Argos outlet, or at collection points in other Sainsbury stores. Alongside this option, home delivery sales also saw an increase of 78%.

Source: TradingView. Past performance is not a guide to future performance.

If the pandemic has marked a sustained change in consumer behaviour, Sainsbury’s will be well-placed to benefit. In particular, its digital capabilities and the possibility that shoppers might lean more towards the click and collect option in future, would play directly into the group’s hands in a way which few competitors could emulate. Even within stores, the “SmartShop” self-service option is beginning to represent a significant proportion of purchases made.

Another traditional strength of Sainsbury’s has been the convenience store format, which has held up surprisingly well with a dip in sales of just 5%. Despite deserted city centres weighing down, strong sales in neighbourhood locations have picked up much of the slack.

These factors have combined to an overall growth in grocery sales of 10.5% in the quarter. From a wider perspective, the estimated increased costs of Sainsbury’s modified business of £500 million will be largely offset by the business rates relief programme, in tandem with the higher resultant sales. 

At the same time, the early repayment of the £500 million revolving credit facility is a show of confidence as well as ample liquidity, which in total should augur well for any decision Sainsbury’s makes on the resumption of the dividend later in the year.

Challenges also remain, as evidenced by the understandable 56% decline in fuel sales, but in particular the 26.7% decline in clothing over the period and a reduction in general merchandise sales overall. While trends may have improved towards the end of the quarter, this nonetheless remains a line which will see additional pressure as clothing retailers generally are allowed to ply their trade once more, with increasingly attractive offers for keen shoppers. Operating costs also remain high due to the enforced changes to Sainsbury’s offering.

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In all, Sainsbury’s has had a largely successful quarter as it has demonstrated an ability rapidly to evolve within a new environment. Initial reaction to this progress has been positive, injecting some life into a share price performance which has remained largely unchanged over the last quarter. 

Over the last year, the group has displayed a rather more defensive quality, with the shares having risen 6.5%, which compares to a decline of 18% for the wider FTSE 100 index. Even though Sainsbury’s may not be the preferred play in the sector, the market consensus of the shares as a ‘strong hold’ could come under some upward pressure after this update.