Value proposition

Sainsbury’s takes a look at the ‘value’ proposition

  • Strong retail free cash flow growth
  • Maintaining profit forecasts

The latest food inflation figures from the British Retail Consortium and NielsenIQ confirmed what beleaguered consumers already knew. The prices keep going up at the checkouts. Food price inflation reached a record high of 11.6% in October, compared to 10.6% in September. Mike Watkins, head of retail and business insights at NielsenIQ, said that “with increasing pressure on discretionary spending in non-food and food retail, delivering good value is at stake in the battle. for buyer loyalty. J. Sainsbury (SBRY) attempted to position itself as a relative value option for buyers in the custom battle, with price increases being implemented at a slower pace than competitors.

A £500million investment in the value proposition is part of the story behind the reduced first-half profit, which includes a 9% decline in retail operating profit. Grocery and general merchandise volumes were down from tough pandemic comparisons, and “higher-than-expected operating cost inflation” clearly didn’t help.

Same-store sales (excluding fuel) fell 1% despite growing 4% in the second quarter, with Sainsbury’s expected to rely on a 40% rise in fuel sales to drive the overall revenue increase. Grocery sales of £11.3billion were up only marginally but were encouragingly 9% above pre-pandemic levels. In other good news, retail free cash flow increased by 37% to £759m and the company stayed true to its target of at least £500m for the year.

Wealth Club head of equities Charlie Huggins said the company, positioned between high-end competitors like Ocado (OCDO) and budget options like Aldi and Lidl, ‘isn’t seen as the cheapest or best’ and ‘with the economy strangled by higher interest rates and inflation, Sainsbury’s will have to work very hard just to stay motionless”.

Either way, the company maintained its underlying full-year pre-tax earnings forecast, good news at a time when the market has no mercy for stocks that miss earnings forecasts. in the range of £630-690 million. This contributed to a 6% rise in shares on earnings day. And the valuation is undemanding, with stocks trading at 10 times forward earnings according to analysts’ consensus position on FactSet, below the five-year average of 12 times. Hold.

Last seen IC: Waiting, 232p, April 29, 2022

J SAINSBURY (SBRY)
ORDER PRICE: 207p MARKET VALUE: £4.84 billion
TO TOUCH: 206-207p TOP OF 12 MONTHS: 304p LOW: 169p
DIVIDEND YIELD: 5.5% P/E RATIO: 8
NET ASSET VALUE: 339p* NET DEBT: 72%

Semester to 17 Sept.

Turnover (in billions of pounds sterling) Profit before tax (millions of pounds sterling) Earnings per share (p)

Dividend per share (p)

2021 (retired) 15.7 527 16.8 3.2
2022 16.4 376 12.3 3.9
% change +4 -29 -27 +22
Ex div: November 10
Payment: 16 Dec
*Includes intangibles of £1.02 billion, or 44 pence per share