Groceries drive 8.2% Sainsburys sales rise under new CEO

Supermarket chain Sainsbury’s reported an 8.2% rise in first quarter like-for-like sales driven by groceries as Britons stocked up during the coronavirus lockdown.

Online sales doubled during the period as customers shifted to home deliveries, but the company added that it expected a £500m hit to profits from Covid-19 “broadly offset by business rates relief and stronger grocery sales” and forecast flat underlying pre-tax profits .

In the first results in new chief executive Simon Roberts, Sainsburys on Wednesday said total grocery sales soared 10.5% in the 16 weeks to June 27 as the UK trend of bigger shops on fewer visits continued. Total retail sales excluding fuel rose 8.5%.

Clothing and fuel sales took a hit during the quarter as customers prioritised food purchases over non-essential items and stayed home during the lockdown. Clothing fell 26.7% and petrol purchases 56.1% during the period.

Online grocery sales surged by 87%, with the chain's Argos division becoming an internet-only operation for the period reporting a 10.7% rise as locked-down families bought garden goods, laptops, computer games and home office furniture.

The company also warned that operating costs remain high, reflecting the costs of safety measures for staff and customers "significantly higher" online participation and weak sales of fuel, clothing and general merchandise.

"The coming weeks and months will continue to be challenging for our customers and our colleagues and we do not expect the current strong sales growth to continue," said Roberts said.

"Even though Sainsbury may not be the preferred play in the sector, the market consensus of the shares as a strong hold could come under some upward pressure after this update.”

"We believe it is appropriate to remain cautious about the sales trajectory through the remainder of the year given the weather benefit to date and a likely further weakening of consumer spending. It remains impossible to predict the full nature, extent and duration of the impact of Covid-19 on sales and costs."

Sainsbury's said it had a strong cash position and would repay £500m borrowed under its revolving credit facililty.

UNCERTAIN FUTURE?

AJ Bell investment director Russ Mould said the warning on costs, plus the fact that the company had not taken any government support or delayed VAT payments highlighted that overall earnings estimates for Sainsbury’s financial year to March 2021 "have actually sagged during the pandemic".

“This could lead investors back to thinking about what Sainsbury’s prospects are like if, as and when trading returns to more normal patterns, should the pandemic release its grip," he said.

“The UK grocery market is mature and highly competitive, so growth of any kind is going to be hard to come by, at least under what could be seen as ‘normal’ circumstances. There is also the danger that a sustained rise in unemployment could hit consumer spending on general merchandise, both within Sainsbury stores and stand-alone Argos sites, and prompt trading down to less expensive brands within the grocery business."

Sophie Lund-Yates at Hargreaves Lansdown noted that around half of all new online customers were new to the group. offering both an "opportunity and a challenge".

"Keeping hold of these new wallets, and existing ones for that matter, will likely involve remaining competitive, which means cutting prices. While that’s a method the group’s already well acquainted with, there’s a chance a further margin-diluting discount effort could be on the horizon, with competitors like Tesco already offering Aldi price matches," she said.

"As the UK braces for a less than savoury economic environment, and consumer spending winds down, this is something to watch.

Interactive Investor's Richard Hunter said the revolving credit loan early repayment "is a show of confidence as well as ample liquidity, which in total should augur well for any decision Sainsbury makes on the resumption of the dividend later in the year".