Is the Sainsbury’s share price in for a bubbly 2022?

The Sainsbury's (LON: SBRY) share price has been on a rollercoaster over the past few years. It struck a high of 336p during August 2018, before sinking to a low of 179p during the covid-19 pandemic crash of March 2020.

Then it spiked to a seven-year peak of 340p last August, as speculation mounted that it would become the next US private equity takeover target after Morrisons. But concerns over the effect of the Omicron variant amid tightening monetary policy during the crucial Christmas trading period saw investor conjecture diminish.

And by mid-December, the Sainsbury’s share price had retreated to 270p. But it’s risen 3% today to 288p, after releasing an upbeat trading update.

Sainsbury’s share price: Q3 results

The headline news is positive for Sainsbury’s — full-year underlying profit guidance has been upgraded by £60 million to £720 million. Moreover, the FTSE 100 company reported strong free cash flow and expects ‘net debt reduction ahead of schedule.’

And while total Q3 grocery sales were slightly below 2020’s elevated levels, they were up 6.6% compared to the same quarter two years ago. Furthermore, they rose 0.8% year-over-year in the crucial six weeks to 8 January.

However, online grocery sales were down 15% year-over-year as customers become more comfortable with visiting physical stores. But this figure is still up 92% compared to pre-pandemic levels. And weekly orders are now trending upwards to 700,000 a week, while Christmas week orders rose 41% year-over-year.

But non-food results paint a different picture. While fuel sales increased by 47.5%, ‘technology, gaming and toy markets all declined by double digits,’ reflecting ‘tough comparatives (and) global supply chain challenges.’ Meanwhile, the chain closed 27 Argos standalone stores and opened 25 new ones inside its supermarkets.

And clothing sales fell reflecting ‘exceptional performance last year.’ However, the company is ‘reducing promotional activity’ to focus on more profitable sales, aiming for 'stronger gross margins and operating cost transformation.’ Accordingly, full-price clothing sales rose 38% compared to pre-pandemic levels.

Sainsbury’s outlook for 2022

The key takeaway is that Sainsbury’s food strategy is working — CEO Simon Roberts emphasised that he is ‘really pleased with how we delivered for customers this Christmas.’ As the inflation-fuelled cost-of-living squeeze accelerates, its mid-luxury branding is well placed to tempt value shoppers from discount options, and wealthier customers who might be feeling the pinch.

The company launched ‘over 600 new products in Q3, of which 300 were new Christmas products, as part of our plan to triple our levels of product innovation.’ And its premium ‘Taste the Difference’ range was the fastest-growing product tier, with sales up 13% over two years in the key Christmas weeks. Moreover, it ‘had record sales of champagne and sparkling wines.’ At the value end, it’s also launching a ‘Quality Aldi Price Match campaign, which targets 150 fresh products that customers buy most often.’ In this new economic climate, Sainsbury’s is growing its market share.

On the non-food front, Argos stores are slowly being shifted inside Sainsbury’s supermarkets, while clothing is changing from a value to a premium offering. With supply chain challenges slowing the metamorphosis, it may be some time before investors see results.

The company has also decided to invest £100 million into its employees, increasing the base rate of pay to £10 per hour and ‘increasing the frequency of a higher discount for colleagues.’ It also closed on Boxing Day, giving most staff the day off. With competitors offering similar pay rises, it serves as a reminder that shop-floor staff are no longer easily replaceable.

Finally, it’s proven strong resilience in the face of a difficult market, remaining a fair target for a US private equity bid. US operator Clayton, Dubilier and Rice’s (CD&R) winning auction bid of 287p a share valued Morrison's at around £7 billion. This represents a 61% premium to the chain's closing price of 178p before the CD&R made its first bid in June 2021.

Sainsbury’s has a larger market share and a £6.7 billion market cap. It could be significantly undervalued. And if its non-food transformation succeeds, the Sainsbury’s share price might usher in 2023 with a champagne reception.

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*Based on revenue excluding FX (published financial statements, October 2021).