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A steady rise in the Sainsbury’s share price over the past year reflects a positive trading performance coupled with persistent talk of a possible takeover for Britain’s second largest grocer. However, interim results next week will be closely eyed for evidence of how the business is coping with rising costs and product shortages.

Among the other factors to look out for will be group like-for-like sales compared with a high watermark period last year and how the online grocery business is performing as more people return to physical stores.

In the first quarter, like-for-like sales excluding fuel were just 1.6% ahead of where they were in 2020, but online grocery sales were up 29%. The “Tu” clothing range was a bright spot, with full price sales up 95% on 2020, reflecting rising demand amid the return of social gatherings.

Restructuring remains a key theme as the company presses ahead with its “food first” strategy. In July, Sainsbury’s guided that it was on track to reduce its retail operating costs to sales ratio by more than 2% by 2023/24.

A substantial number of Argos outlets have now been incorporated into Sainsbury’s stores – 20 more in the second quarter – bringing the total to 356. The group will be hoping these moves will continue to prove a strong footfall driver even as the pandemic ends.

Competition in Sainsbury’s core grocery market remains fierce. For all its efforts to cut the prices of everyday essentials – notably via its “Aldi Price Match” campaign – Sainsbury’s still finds itself stuck between the German discounters at one end of the price scale and M&S and Waitrose at the other.

Being somewhere in the middle is nothing new for Sainsbury’s. It’s a difficult place to be; ever more so since the recent acquisitions of Asda and Morrisons, which are likely only to intensify the battle for market share through price cuts. The company clearly needs to persist with efforts to differentiate itself from its mid-market competitors.

A bid for Sainsbury’s remains a possibility, given the takeover of Morrisons was keenly contested and left only two of the big-four grocers in public hands. Sainsbury’s has many attractions including a significant portfolio of convenience stores, a nationwide presence in non-food through its Argos and Habitat brands and a growing online business.

The ending of talks last week over the sale of Sainsbury’s banking unit probably makes the group slightly less attractive to potential suitors, who might have preferred a more focused business model. However, the bank has around two million customers and reports having seen a recovery in consumer demand for cards and loans since the start of the year.

Cost pressures and product shortages are likely to remain recurring themes over the next few months and, with expensive restructuring still at hand, the near term future may remain challenging. However, the Sainsbury’s share price appears to discount at least some of these risks trading on a multiple of around 14 times expected earnings and offering a dividend yield of 3.5%1.

Source:

1  Reuters, 28.10.21

Important information: Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. When you are thinking about investing in shares, it’s generally a good idea to consider holding them alongside other investments in a diversified portfolio of assets. Investors should note that the views expressed may no longer be current and may have already been acted upon. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

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