Shares in supermarket group J Sainsbury (SBRY) fell 4.5% to 276p after the firm’s Argos subsidiary posted a 12% drop in second quarter sales, marring a positive performance in the core grocery business.
At the group level, sales for the first half to mid-September were up 5.3% to £15.72 billion thanks to a 0.8% increase in grocery sales and a 62.7% increase in fuel sales due to higher prices and higher demand.
Underlying pre-tax profits were up 23% to £371 million thanks to higher grocery sales and a successful cost reduction programme, in particular at Argos.
NON-FOOD SALES WEAK
In grocery, the firm’s Food First strategy helped drive sales in-store and online with customers switching to its value proposition and a ‘strong’ improvement in customer satisfaction scores.
However, Sainsbury’s in-store general merchandise sales were down 8% in the second quarter while the poor performance at Argos wiped out the progress shown in the first quarter.
Unsurprisingly, management blamed supply chain challenges for the loss of sales at Argos, although it also flagged unseasonal weather and lower demand for home office equipment and technology compared with last year.
NO CHANGE TO FORECASTS
In terms of outlook, grocery sales growth is expected to moderate, meaning the firm will need to keep prices low to reinforce its ‘value position’, while non-food sales face tough prior-year comparisons.
The firm insists it is ‘well placed to deal with a backdrop of global supply challenges and a tight labour market’, and reiterated its previous target of full year pre-tax profits of at least £660 million with a longer-term target of generating average retail free cash flow of at least £550 million per year from March 2022 to 2025.
EXPERT VIEW
Shore Capital’s Clive Black, whose views on the retail sector are widely followed, said he was ‘pleased and relieved’ with the firm’s guidance.
‘We believe Sainsbury's stock offers good value for investors in the medium-term. Simon Roberts is piloting the ship well and if investors that have made a return on their Morrisons position wish to retain an interest in the UK grocery field then Sainsbury and Tesco are sound homes in our view’, added Black.
