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Earnings season: Sainsbury’s figures sparkle, but would I invest?

Mature black couple enjoying shopping together in UK high street

January kicks off the earnings season for retail traders. First out of the blocks is Sainsbury’s (LSE: SBRY), which reported its numbers today for the all-important Christmas period.

Trading highlights

For the 16-week period ending January 7 2023, grocery sales were up 5.6% on the same period last year. The six-week Christmas period saw a rise of 7.1%. However, 0.9% of that figure reflected Boxing Day trading. In 2021, stores were closed that day.

What’s becoming abundantly clear is that as a cost-of-living unfolds, shopping habits are changing. People planned ahead, buying non-perishable items early. However, some of this trend could be down to the unusual timing of the World Cup.

Interestingly, sales from its premium Taste the Difference range were up 10% year on year. In this range, mince pie sales were up 22% and panettone 49%. It also enjoyed record sales for champagne and prosecco.

However, Sainsbury’s is not just about food. Argos makes up a small, but not insignificant slice of its sales. For the six-weeks to Christmas, sales growth across general merchandise was 7.4%. In particular, sales of technology products were particularly strong, driven by improved availability and promotional activity in the run up to the World Cup.

For the full financial year, it’s expecting profits to be towards the upper end of the guidance range of £630m to 690m. Retail free cash flow is projected to be around £600m, ahead of previous guidance of £500m.

Pressures are mounting

Sainsbury’s is being squeezed from all angles. It’s no secret that the big supermarkets have been losing out to budget chains for some time. This trend seems to have accelerated over Christmas.

Four-week grocery volume change data to December 25 highlights that Sainsbury’s is losing out to Aldi and Lidl. However, the rate is slowing. Although both offer a fraction of the range, they have added millions of square feet of new space. I expect this trend to continue.

Behavioural change among customers is resulting in altered basket dynamics. Notably, this involves switching to Sainsbury’s own-brand products as well as moving from fresh to frozen. The emphasis on value has never been so important.

In response, the company is investing £550m in price initiatives. This includes Aldi Price Match and Price Lock. There are signs that this investment is starting to pay off. Nielsen panel data highlights that Sainsbury’s is consistently inflating behind the market on the most bought products. Indeed, it has improved its price index against Aldi by 400 basis points in 18 months.

Investment case

Sainsbury’s is what I would describe as a classic defensive play. As a consumer staple, I don’t expect to see its revenues fall off a cliff if a recession does happen in 2023. However, I remain to be convinced whether it’s a good investment.

I can certainly make a case. Profits are significantly higher than before the pandemic. It’s a strong cash-generative business and sports a dividend yield above the FTSE 100 average.

That said, to me it seems to be constantly playing catch-up with the German chains. The fact that one of its main slogans is Aldi Price Match demonstrates my point most aptly here. I won’t be investing.

The post Earnings season: Sainsbury’s figures sparkle, but would I invest? appeared first on The Motley Fool UK.

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Andrew Mackie has no position in any of the shares mentioned. The Motley Fool UK has recommended J Sainsbury Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.