Sainsbury’s hit by investor concerns about inflation and interest rates

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J Sainsbury PLC (LSE:SBRY) posted a solid set of first-half results but forward-looking investors are concerned about what’s in store for the grocer in the months ahead.


Shares in the FTSE 100 supermarket group hit a seven-year high this summer as takeover speculation surged, with private equity and Czech billionaire Daniel Kretinsky seen as potential suitors after rivals Morrisons and Asda were snapped up in the past year.


The results showed sales excluding fuel fell in the past six months compared to the lockdown-fuelled demand boom last year, although compared to pre-pandemic levels, revenues were up 7.3%.


Customers are still buying more grocery and clothing, including online, but there has been a decline in general merchandise as other post-lockdown shopping patterns have returned to the old ways.


While you can’t really knock Sainsbury’s for its first-half performance, said analyst Laura Hoy at Hargreaves Lansdown, investors aren’t interested in past accolades – particularly with inflation raging and interest rate hikes expected from the Bank of England (even though officials did not move the dial today).


Investors are looking for future growth – “and unfortunately Sainsbury isn’t at the top of the list”, said Hoy.


Management stuck to guidance for profits of around GBP660m at the full year, which represents a 7% decline from last year.


“This is particularly concerning considering the group’s lacklustre targets include the all-important festive shopping season. Christmas tends to be supermarkets’ time to shine as people load up on turkeys and champagne, but Sainsbury’s guidance suggests the supply chain issues and labour shortages this year could prove somewhat of a challenge,” she added.


Inflation loomed equally large over Sainsbury’s numbers.


Chris Beauchamp at IG said, “it is clear that the market is worried the sector will come under greater pressure in the months to come”.


“While the story of US earnings season has been about companies able to pass on higher costs and maintain, and indeed increase, profit margins, supermarkets will find it harder to do this. Sainsbury’s growth of market share will be at the expense of margins, which helps explain why the shares continue to struggle in an overall rising market.”


For investors that believe a takeover is possible there are reasons to keep backing the company, while there remained support in the City.


Darren Shirley at Shore Capital said it was a “reassuring” update from Sainsbury’s shares, with the broker retaining its ‘buy’ rating on the shares, which trade for 12.9 times full year earnings and offer a dividend yield of 4.1%.


He noted management said used the term “at least” with reference to profit expectations.


“As such we believe that Sainsbury’s stock offers good value for investors in the medium-term, noting that we would be surprised to see fireworks around the share price with today’s update. [The board are] piloting the good ship Sainsbury well and if investors that have made a return on their Morrisons position wish to retain an interest in the UK grocery field then Sainsbury and Tesco are sound homes in our view.”


Similarly, at UBS, Sreedhar Mahamkali said that, notwithstanding issues such as stressed supply chains and inflation, “we see this outlook as prudent especially with the lower net finance costs and indeed expect modest upgrades to consensus. The shares may initially be a little muted with a lack of upgrade but we see good underlying momentum in the business, progress on the costs and a strong FCF which should help.”

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