Where next for the Sainsbury's share price after rising 42% in a year?

Up 42% in the last twelve months, the Sainsbury's (LON: SBRY) share price has had a fantastic year. On 23 August, it hit a seven-year high of 340p, when speculation was rife that it could be the next takeover target after Morrisons. As this possibility receded, the share price fell 17% to 282p. And yesterday alone, the FTSE 100 giant lost 2% of its value. While the UK’s second-largest grocer strikes an optimistic forward-looking tone in interim results, its near-term future is uncertain.

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Sainsbury’s share price: Interim results

At the very top of its interim report, the grocer highlights a ‘strong performance with market share gains as we put food back into the heart of Sainsbury’s.’ And the numbers back this statement up. Total retail sales are up 0.2% against H1 20/21 and 7.3% against H1 19/20. Grocery sales grew 0.8% against H1 20/21, and 9.1% compared to H1 19/20.

In this H1 21/22, underlying profit before tax rose by 23% to £371 million compared to H1 20/21, and 56% compared to H1 19/20, ‘reflecting higher grocery sales and effective cost reduction programmes.’ On a statutory basis, profit before tax hit £541 million, reflecting ‘lower restructuring and impairment costs,’ and ‘£181 million of exceptional income from settling legal disputes.’

But while overall statutory group sales rose by a healthy 5.3%, much of this rise was due to increased fuel sales, which rose by a whopping 62.7% as the UK’s economy rebounds.

And the supermarket giant emphasises the importance of comparing yesterday’s results with figures from H1 19/20, as results from H1 20/21 were significantly stronger than normal due to the marketplace advantages the company benefited from during pandemic lockdowns.

Because of the strong comparables, general merchandise sales fell by 5.8% against H1 20/21, while sales at Argos fell 12% year-on-year. ‘Supply challenges, unseasonal weather and lower demand for home office equipment and technology’ were also blamed for the fall. However, it’s worth noting that to cut costs, Sainsbury’s has permanently closed 120 standalone Argos stores since the pandemic began.

Meanwhile, Sainsbury’s boasted a free cash flow of £554 million and a net debt of £27 million, which had fallen 90% from £267 million in the same period last year. And encouragingly, the interim dividend was maintained at 3.2p per share, as was profit guidance of £660 million in the full FY 21/22.

Looking to the future

Online grocery sales rose 128% compared to H1 19/20 and 12.8% compared to H1 20/21, with 72,000 orders now being delivered every week. And 83% of Argos sales were generated online compared to 61% in H1 19/20, though this shift is partially due to the closure of some physical stores.

Looking forward, CEO Simon Roberts commented that ‘we have grown market share through improving value for customers, tripling our rate of food innovation, and delivering customer satisfaction ahead of our key competitors.’ However, he warned that ‘our industry faces labour and supply chain challenges. However, our scale, advanced cost saving programme, logistics operations and strong supplier relationships put us in a good position as we head into Christmas.’

But one of its major distributors, EVCL Chill, collapsed in September. The journey from farm to store shelf involves a complex web of interconnected companies that could still cause supply headaches. And with the UK short of 100,000 HGV drivers, gaps on shelves may be difficult to avoid. Meanwhile, the microchip shortage means that electronics may be in limited supply.

Moreover, while Roberts said that he would ‘do all we can to mitigate inflationary headwinds,’ a cost-of-living squeeze could see consumer appetite for its luxury ‘taste the difference’ range decline, and profit margins fall.

The Sainsbury’s share price has the potential to rise further. But it has plenty of headwinds going into the crucial Christmas trading period.