​​Sainsbury's: geared for growth ahead of Q1 trading statement

​​​Sainsbury's: geared for growth ahead of Q1 trading statement

Sainsbury's is entering a period of confident growth and strategic expansion, reflected in its very high 45x price-to-earnings (P/E) ratio compared to half of the companies in the UK with a P/E below 16x. Such a high P/E ratio may worry some investors as it may question the viability of the company’s share price unless growth matches expectations.

​Looking ahead, according to analysts, earnings-per-share (EPS) is estimated to climb by 60% per year over the next three years, around four times what the market predicts, positioning Sainsbury’s for a stronger earnings result.

​This week’s execution of its share buy back strategy and last week’s sale of most of Sainsbury’s banking business to British lender NatWest will probably be mentioned in the British second-largest supermarket chain’s first quarter (Q1) trading statement on Tuesday.

​In its recent capital markets update, the company outlined plans to increase consumer spending in key categories where it currently underperforms, like frozen foods and household chemicals. It will also continue leveraging strengths in fresh foods while finding efficiencies across operations.

​A core priority is growing sales in the frozen food and household chemicals categories. Sainsbury's believes there are significant opportunities in these areas where competitors have larger market share. By focusing innovation and marketing efforts here, it aims to entice customers to spend more per shopping trip. Success could also bolster Sainsbury's broader grocery proposition.

​The company will build on existing strengths in fresh foods like produce, meat and bakery. Sainsbury's has an established reputation for quality in these areas, which it can leverage through focused enhancements to product ranges and in-store experiences. Maintaining leadership in fresh foods helps attract customers and drive frequency of purchase.

​Another major asset is Sainsbury's Nectar loyalty program. By using Nectar data and insights to deliver targeted promotions and personalized offers, Sainsbury's has been able to effectively drive engagement among its customer base. The company will continue optimizing Nectar to acquire, retain and better understand its customers. This is crucial for long-term growth.

​Expanding its physical footprint in areas where market share is currently low is another priority. Sainsbury's has plans for a wave of new store openings to grow its presence across the United Kingdom. Entering these underserved regions would allow Sainsbury's to reach more shoppers nationwide.

​As Sainsbury's pursues multiple avenues for growth, it remains committed to cost control and operational efficiency. Finding cost savings and supply chain improvements is viewed as essential, even as new stores open and product offerings expand. This balancing act allows Sainsbury's to stay competitive in a highly challenging grocery landscape.

​In summary, Sainsbury's growth plans target both new customers and offerings, while consolidating existing strengths. Key focus areas are increasing consumer spend on frozen foods and household chemicals, continuing innovation in fresh foods, utilizing Nectar data, expanding through new stores and maintaining tight operational controls. Delivering on these strategic initiatives would help Sainsbury's gain market share while preparing for long-term success. Its upcoming Q1 trading statement will indicate how execution is progressing.

​Analysts recommendations

​Fundamental analysts are rating Sainsbury’s as a ‘buy’ with LSEG Data & Analytics showing 2 strong buy, 5 buy, 3 hold and 2 sell - with the mean of estimates suggesting a long-term price target of 314.73 pence (p) for the share, roughly 21% above the share’s current price (as of 27 June 2024).

​IG sentiment data shows that 90% of clients with open positions on the Sainsbury’s share expect the price to rise over the near term while 10% of clients expect it to fall. This week saw 85% of IG clients (sample size of between 251 and 500) buy the Sainsbury’s share compared to 70% this month.

​Technical analysis on Sainsbury’s share price

​The Sainsbury’s share price, down around 13% year-to-date, compared to the FTSE 100’s 6% gain, trades back around the lower end of its 2023-to-2024 sideways trading band.

​Sainsbury’s Weekly Chart

In March the Sainsbury’s share price retested its October 2023 low at 243.8p which, together with the 200-week simple moving average (SMA), now at 252.6p, acted as support over the course of two weeks.

​The early-March-to-May-advance keeled over at its 289.00p high before the Sainsbury’s share price slid back below the 55-week SMA at 269.5p, range trading below it over the past three weeks.

​The October 2022-to-June 2024 uptrend line at 257.8p currently offers support. While it and the mid-April-to-current June lows at 255.4p-to-254.6p underpin, the Sainsbury’s share price retains the possibility of another up leg being witnessed.

​A drop through the 254.6p April low would put the 200-week SMA and March 2023-to-March 2024 major support zone at 252.6p-to-243.8p back on the plate.

​Sainsbury’s Daily Chart

​For the Sainsbury’s share price to resume its medium-term uptrend, a rise and daily chart close above last week’s high and the 55-to-200-day SMAs at 268.0p-to-269.1p highs would need to be seen. Only then could the May peak at 289.00p be back in the frame.