Stock Watch

Sainsbury’s share price rally poised to continue

CMC Markets

Sainsbury’s share price is likely to continue its recent rally after it posted a respectable set of first-quarter figures this morning. 

Sales and business rates cut offset by higher costs

Total retail sales excluding fuel jumped by 8.5%, and on a like-for-like basis increased by 8.2%. Grocery sales rose by 10.5%. Clothing sales slumped by 26.7%, while the general merchandise division – which includes Argos – saw sales rise by 7.2%. The lockdown promoted a surge in demand for food items and to a lesser extent household goods, as a lot of people were largely confined to their homes. In April, the retailer cautioned the Covid-19 crisis might impact profit by up to £500 million, but now it feels it will cost more than that. On the bright side, the scrapping of business rates and higher grocery sales should broadly offset the impact.

Simon Roberts took over from Mike Coupe as CEO at the start of the month, and he congratulated his colleagues on doing an "amazing job" in relation to adapting the business. In the 16-week period, online sales more than doubled. Fuel and clothing sales underperformed, but they have recovered more quickly than anticipated – this trend is likely to continue as the lockdown restrictions are set to ease further. The group cautioned that consumer spending will probably weaken as the level of activity seen in March and April was extraordinary.

Sainsbury's share price volatility

Sainsbury’s share price saw a huge increase in volatility in mid-March, and that was when global stock markets were driving lower. Back then the number of Covid-19 cases were increasing at an exceptional rate and the lockdowns were coming into force. Many industries, such as construction, hospitality and aviation, were effectively being shut down, so traders’ attention was directed towards supermarkets as they remained open, and some stockpiling was taking place too.

For a while supermarket stocks essentially acted as flight to quality plays as groceries were in high demand. When things settled down in April and equity markets began to rebound, Sainsbury’s share price came off the boil as dealers were keen to buy into riskier stocks.

The group posted its full-year figures in late April, and underlying pre-tax profit fell to £586 million, from £601 million the year before. The supermarket giant said it would defer any dividend payment decision until later this year – a prudent move given the uncertainty. At the time of the announcement, scores of companies were either cutting or cancelling their dividends, so it was not like they were unique in that regard.

Earlier this month, Kantar published its report on the UK grocery sector. According to the research group, total grocery sales in the four weeks until mid-June jumped by 18.9%. Convenience stores and online sales performed well across the board. As far as the ‘big four’ supermarkets go, Sainsbury’s found itself in the middle of the pack, even though it registered 10.2% sales growth.

Meanwhile, Tesco, Morrisions and Asda saw sales increase by 12.1%, 10.5% and 6.3% respectively. In that timeframe, total online grocery sales jumped by over 90%, so perhaps Sainsbury’s will look to expand its online operation, and at the same time, cut its exposure to the high street.   

Sainsbury’s share price has been pushing higher for over a month now and yesterday hit its highest level since late April.

 


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