Sainsbury's shares: results look ahead

Sainsbury (J) PLC unveils full-year results on Thursday this week. The bullish supermarket operator upped its full-year earnings guidance at its third-quarter trading update in January and announced upbeat Christmas trading.

But in the light of the cost of living crisis and pressure from higher input costs, investors will want to know if the supermarket chain is still just as optimistic about the future.

While rival Tesco recently posted its biggest profits for years, it also warned that inflationary costs would hit earnings, with profits expected to be lower this year.

Analysts forecast that Sainsbury’s will return to profit in 2022, with the supermarket chain hiking its earnings guidance to underlying pre-tax profits of “at least £720m” in the year to March.

Last year Sainsbury’s made a pre-tax loss of £261m after the chain was impacted by £485m of pandemic-related costs, which wiped out 39% of underlying profits. These charges related mainly to the cost of making its stores and operations Covid-19 safe.

However, it is likely to include a similar warning about rising costs and pressure on margins as Tesco.

Another issue for the supermarket chains is that they are struggling with a lack of staff, partly driven by Covid-19, and rising wage costs. More staff are needed for packing because of the increase in online sales. Both Sainsbury’s and Tesco’s recently increased rates to £10 an hour.

In Tesco’s case, this has added another £200m to wage costs. Sainsbury’s says it has invested another £100m in its staff rewards.

Sainsbury’s bumper Christmas

Nevertheless, the supermarket enjoyed strong Christmas sales, and buoyant third-quarter trading, gaining market share. Over the Christmas period, online grocery sales increased by 92% against the same period two years ago, with orders in Christmas week up 41% year on year.

Sainsbury’s also offers groceries on demand from 580 of its stores via Deliveroo, Uber Eats and Chop Chop.

Third-quarter grocery sales were up 6.6% on the same period two years ago. Meanwhile, full-price clothing sales rose 38% due to fewer reductions and fuel sales rose 47% during the period.

Bad debts at the financial services side were lower than expected and the Argos acquisition is bedding down well, with margins benefiting from cost savings. Management also said that it is ahead of schedule in paying down net debt.

Could Sainsbury’s be a bid target?

Last summer there was speculation that Sainsbury’s could be a takeover target and there was talk of private equity interest from Apollo, following the acquisition of Morrison’s. However, this came to nothing and Sainsbury’s CEO Simon Roberts said at the time: “If we had anything to update on we would be updating on it.” With its strong cash generation, it’s possible interest could be renewed.

Analysts at broker Jefferies recently upgraded their rating on the shares from hold to buy, setting a 300p price target. At 236.7p, the shares are currently trading near their year lows. As such, they are a long-term buy on strong trading and bid hopes.

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*Based on revenue (published financial statements, 2022).