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Could Sainsbury's shares have further to rise?

The retailer profits slump by over 60% but the company is upbeat on outlook

Could Sainsbury's shares have further to rise? Source: Bloomberg

Full-year profits at Sainsbury more than halved last year to £327 million versus £854 million last year – a drop of 62%. The grocery chain was hit by non-cash impairment items, as well as a higher discounting rate on products. However, underlying profits were £690 million – down from £730 million in the previous period.

Group sales including VAT rose by 5.4% over the year to £35.2 billion (£33.4 billion last year). Retail sales improved by 5.2% during the period, while grocery sales improved by 5.1%. However, stripping out fuel sales, retail turnover was up by just 2% during the year. Nevertheless, retail sales excluding fuel rose by 7.1% in the fourth-quarter. Retail free cash flow was impressive, coming in at £645 million.

The retailer is upbeat on outlook, though, expecting underlying profits before tax of between £640 million and £700 million in the full-year 2023/24, and to deliver at least £500 million in retail free cash flow.

Sainsbury’s: battling inflation

“We are absolutely determined to battle inflation for our customers,” Simon Roberts, chief executive of Sainsbury’s, told investors. Our focus on value has never been greater and we have spent over £560 million keeping our prices low over the last two years. As a result, we are now the best value compared to our competitors that we have been in many years and we are delivering improved market share performance in Sainsbury’s and Argos.

“We are two years into our plan to put food back at the heart of Sainsbury’s and have focused our efforts on reducing costs right across the business… At the same time, we have improved the performance and profitability of Argos, Tu, Nectar and Financial Services.” Combined, the businesses, along with Habitat, are £145 million more profitable than before the pandemic, according to Sainbury’s.

Value is a major consideration in retail right now with the cost of living crisis. Sainsbury’s has taken a leaf out of Tesco’s book by promoting its Nectar Card price scheme to customers, similar to the Tesco Club Card programme. Sainsbury’s currently has 11 million Nectar Card users. It also offers an Aldi Price Match. The company says it has invested £200 million in cutting prices, while delivering £900 million of cost savings over the last two years. It is currently on track to make £1.3 billion of synergies over three years.

Meanwhile, the company says Argos has managed to grow market share under its ownership, despite a weak general merchandise market.

Could Sainsbury’s shares have further to rise?

The supermarket looks to be in good health. Analysts at broker Barclays recently upgraded their price target on the shares from 285p to 295p. At 274p the shares are up 19% this year but have yet to revisit their five-year highs of 315p, last seen in November 2018. Inflation is set to ease later this year but investors could be forgiven for taking some profits.


Past performance is not a guide to future performance

This information has been prepared by IG, a trading name of IG Markets Ltd and IG Markets South Africa Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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