Have Sainsbury’s shares run out of steam?

Sainsbury's unveils its first quarter trading statement on 4 July. Investors will be looking to see how the business is faring in the current high inflationary environment. Economists had been expecting inflation to ease this spring and summer, but recent figures out last week were disappointing.

Inflation came in at 8.7% in May, unchanged from April figures, according to the Office for National Statistics. Core inflation, which strips out food, energy and tobacco prices, remains stubbornly high, reaching 7.1% in May.

On the bright side, recent UK retail sales volumes were stronger, up 0.3% in May, according to the Office for National Statistics, thanks to falling petrol prices and the warmer weather. Economists had previously pencilled in a 0.2% fall.

Sainsbury’s: battling inflationary forces

Sainsbury's peers are reporting higher sales. Next reported last week that profits for the full-year would be better than previously forecast due to an unexpected boost from April wage increases and the warmer weather. Sainsbury’s rival Tesco also recently unveiled an 8% increase in its first-quarter results, but warned that although it believed “peak inflation” had eased, high labour costs would continue to be a challenge for UK firms.

At the full-year results in April, Sainsbury’s said that at this “early stage of the year” it expected underlying profit before tax of between £640 million and £700 million for the full-year 2023/24 and that it would generate at least £500 million of retail free cash flow.

Pre-tax profits for the year to 2023 more than halved to £323 million from £854 million in 2022, mostly due to non-cash impairment items as well as higher discounting on profits. However, underlying profits fell to £690 million from £730 million the previous year. The company says it has also succeeded in making its Tu clothing brand, financial arm, Argos and Habitat more profitable, as well as cutting £900 million of costs out of the business.

Embarrassingly for its brand, Argos was recently named and shamed by the government, along with WH Smith and other companies, as having been fined for failing to pay some of its staff the minimum wage.

The need to offer value in the cost of living crisis

Sainsbury’s immediate success will be down to how it grapples with continued inflation and its ability to attract customers in the cost of living crisis. It recently invested £200 million in price cuts and is applying Nectar card discounts to products, aping Tesco’s Clubcard scheme and introducing an Aldi price match.

Analysts at broker Citigroup recently cut their price target on Sainsbury’s shares to 295p from 320p and currently have a ‘neutral’ rating.

Sainsbury’s shares have had a stellar run and are up 26% this year to 257.2p. So have they finally run out of steam? The shares are still trading below their five-year highs of 316.95p seen in September 2018, so could have further to rise. They also offer a dividend yield of 5%.

Past performance is not a guide to future performance