Shares in Sainsbury's (SBRY) skipped almost 3% higher to 375p after investors toasted a stronger-than-expected fourth quarter update. Record customer numbers, positive strides in 'multi-channel' and expansion into non-food categories are helping Britain's third-biggest supermarket chain outperform struggling rivals.


For the three months to 16 March, the FTSE 100 constituent's sales rose 6.3% excluding fuel. The market was wowed by forecast-busting like-for-like sales growth of 3.6% (excluding fuel), which was comfortably ahead of last year's 2.6% gain; and 0.9% growth for the third quarter. Forthcoming (8 May) finals should reveal like-for-like sales growth of 1.8% for the year as a whole.


Chief executive officer (CEO) Justin King was able to crow that Sainsbury's had increased market share and outflanked rivals in 'a tough retail environment' following a quarter in which customer transactions grew to 22.9 million per week. This record figure means the £6.9 billion cap, which has emerged untainted from the horse-meat scandal which has affected larger rivals Tesco (TSCO) and Wal-Mart (WMT)-owned Asda, is serving more customers than ever before.


None of Sainbury's own-label lines have yet been affected by the meat contamination issues that have rocked the food industry. In today's statement, King stressed Sainsbury's has regularly carried out DNA testing on its products for more than a decade and said the horse-meat scandal underscores 'the importance of our detailed understanding of our supply chain.' The CEO took the opportunity to remind the market that Sainsbury's fresh chicken has been 100% British since 2003, while all its fresh beef is sourced from the UK and Ireland.


Driving Sainsbury's sparkling performance was strong growth behind own-brand products, supported by the price reassurance of Brand Match on branded lines. Particularly impressive sales growth was derived from non-food products, where margins are generally higher,and Sainsbury's recently reached the £1 billion annual sales from general merchandise milestone. For the fourth quarter, clothing sales were up nearly 20% year-on-year and home accessories sales jumped by the best part of 25%.


Crucially, Sainsbury's continues to flex its muscles in the all-important multi-channel arenas of online and convenience. Boosted by new space and sprightly like-for-like growth, its convenience business grew by more than 18%, while online grocery sales surged almost 20% higher despite January's heavy snowfall. Significantly, this means the store-based supermarket is growing its web-based business faster than specialist online outfit Ocado (OCDO), currently in talks with Britain's fourth biggest supermarket Morrisons (MRW), which last week (14 Mar) signalled its intention to enter the online grocery fray.


Despite this morning's better-than-expected sales figures, Shore Capital's Clive Black is sticking with his 'hold' recommendation on Sainsbury's. However, the analyst nudges up his full year taxable profits estimate from £744 million to £750 million and has tweaked his earnings estimate up from 30.2p to 30.4p, although he is sticking with his £804 million profit forecast for 2013/14.


While acknowledging Sainsbury's accelerating sales growth, Caroline Gulliver at Espirito Santo has a 'neutral' rating and 350p fair value estimate for the stock. This is because she believes 'Sainsbury will continue to outperform its direct peers for sales growth but that margin growth will prove hard to achieve as we expect Tesco and Morrison to invest more.' Gulliver adds that 'longer term we believe the gently increasing proportion of online food shoppers will put pressure on operating margins, even though sales should increase, at least in the short term, as Sainsbury can improve its “share of basket” with customers.'

Issue Date: 19 Mar 2013