Sainsbury Earnings: Resilient Growth With Fiscal 2024 Profit Guide In Line With Our Estimates

J Sainsbury’s SBRY reported fourth-quarter fiscal 2023 results with like-for-like sales growth up 5.9%, including fuel sales (up 7.8% excluding fuel sales). This compares with 7.6%/7.8% like-for-like sales growth excluding fuel sales in U.K./Republic of Ireland, respectively, for Tesco in the same period. Grocery sales growth was 7.4%, with clothing at minus 1.9% and Argos recovering strongly, up 9.3%. Grocery performance continued to recover sequentially (up 5.6% in the third quarter and up 1.2% in the second quarter), along with general merchandise sales aided by Argos. Argos’ sales growth was particularly pleasing, up 9.3% versus 4.5%/1.6% in the third/second quarters and down almost 21% in the first quarter of fiscal 2022. Underlying profit before tax came in at the upper end of guidance range at GBP 690 million, broadly in line with our estimates (GBP 683 million in our model). Sainsbury’s Price Lock commitment covers over 2,000 everyday products, which we believe, along with Aldi’s price match scheme on now 300 (at the end of December) high-volume fresh food products, is central to enhancing the value perception gap with competitors. This has been a strong GBP 560 million investment for Sainsbury’s over the last two years and driven by the grocer’s cost-savings programme. We believe Sainsbury’s current strategy and execution, along with its already strong online capabilities, place the grocer in a strong position in an increasingly competitive U.K. grocery market. Management introduced cautious guidance for an underlying profit before tax of GBP 640 million-GBP 700 million versus GBP 702 million in our model in fiscal 2024. We don’t expect to materially change our GBX 278 fair value estimate and no-moat rating. Shares are fairly valued.