Is the Sainsbury share price too cheap to miss after a return to profit?

The Sainsbury (LSE:SBRY) share price has fallen steadily in 2022. At the time of writing this article, it is trading at 234p, down 14.5% in the first four months of 2022. But the grocer has released the preliminary annual results for 2021/22, which show a strong increase in revenue and a return to profitably for the first year since the 2020 lockdown. 

How is the market reacting to these results, and would I consider an investment in Sainsbury shares right now? Let’s find out.

Return to profitability

As Covid costs reduced steadily throughout financial year (FY) 2021, the company turned a decent profit. Preliminary results show that the underlying pre-tax profit was £730m. This is a 25% jump from pre-pandemic FY2019 levels and a whopping 104% increase from loss-making FY2020.

Grocery sales rose 7.6% compared to FY2019 and the company managed to retain customers gained during the pandemic grocer boom in 2020. Customer retention from this period is largely attributed to discounts and higher customer satisfaction scores compared to other large grocery chains. Also, bumper sales during Christmas 2021, up 41% year on year, was a promising sign last year.

The company also announced a final dividend of 9.9p, which would bring the full-year dividend to 13.1p per share, which is 24% higher than last year. The current yield for Sainsbury shares stands at 5.53%. 

But the big question is whether the UK’s second-biggest grocer can sustain the current growth rate or will sales drop as buying patterns normalise? And what does it mean for the Sainsbury share price? 

Rising costs

Along with the preliminary results, the company released an outlook for 2022/23 that was not as favourable. Rising raw material costs, fuel prices, and uncertainties caused the board to cut pre-tax profit estimates to £630m-£690m. Initial group estimates were around £730m. And as a result of the reduced revenue estimates, the Sainsbury share price took a 5% tumble last week. 

The grocer warned the public of a possible trickle-down that could affect food prices this year. This could cause customers to move to discount retail options like Aldi and Lidl. And Sainsbury has already cut prices of over 100 products as part of its ‘Aldi price match’ campaign.

These discounts, coupled with rising costs, caused cash flow from retail to fall by £281m to £503m in FY2021. The group’s net debt increased to £6.8bn from £6.5bn in the same period.

However, the company is making the right moves to cut down operational costs while trying to shield consumers. The company is reducing the number of standalone Argos stores in the country. In the last year, 73 standalone Argos stores closed and 64 opened within Sainsbury stores.

And despite the concerns mentioned earlier, the company has performed strongly to reach profitability and increase its dividend. I like the value the Sainsbury share price offers at the moment. The business has largely retained its market share while finding workarounds to counter inflation. I think I’ll wait to see how the market responds to the results this week before investing in Sainsbury shares in May.