Over the past 12 months, the Sainsbury’s (LSE: SBRY) share price has lost 10%. Compared to Tesco‘s gain of 20%, that’s really not good. The comparison is similar over five years — Tesco up 22%, Sainsbury down 13%.
But in “a year of unprecedented change,” in the words of CEO Simon Roberts, the 2021-22 year saw a recovery in profits. Has the share price just not caught up with the turnaround yet, and can I afford to ignore it now?
The inflation problems of 2022 won’t help, squeezing margins at just the wrong time. In the conditions we face today, I’d expect to see Sainsbury’s coming under tougher pressure from the cut-price cheapies.
If I were to invest in the sector now, I think I’d either want to go for the market leader or the cheap competition. The latter is Aldi and Lidl, which I can’t buy. So that would leave my supermarket investing thoughts focused on Tesco.
What am I missing?
But the latest results suggest I might be missing an opportunity. Compared to the 2019-20 year, just before Covid-19 took hold, grocery sales rose 7.6%. There’s clearly a pandemic boost there, with home deliveries growing. But it was also broadly flat compared to 2020-21.
So, as far as year-end in March at least, Sainsbury’s hasn’t seen any drop off as restrictions eased. It’s still early days, mind. I’ll be watching closely for this year’s Q1 results, due in July.
Sainsbury’s recorded an underlying pre-tax profit increase of 25% on the 2019-20 year, which I think is a key figure. The 104% gain over 2020/21 is less meaningful, considering hefty Covid costs that year.
Weakening outlook
This all sounds good enough to me. But here’s a downside… the company expects profits to drop significantly this year. The current outlook puts underlying pre-tax profit at between £630m and £690m. That would be anything between 5.5% and 13.5% down on the year just ended.
“Significant external pressures and uncertainties” is what Sainsbury’s puts it down to. Right now, that’s looking like a combination of high inflation, squeezed margins, and intense competition. The grocer is on an ‘Aldi price match’ binge at the moment too, and that is surely squeezing margins.
All in all, I’m not too surprised that the SBRY share price took a tumble in response to these announcements.
Is Sainsbury’s share price cheap?
Would I buy Sainsbury’s shares now? I still think the chain is trying to find its place in the sector. It has shaken off its slightly upmarket positioning and, in many ways, is simply competing on price. And realistically, I think that was the only sensible way to go.
But it remains to be seen what share of the market Sainsbury’s can maintain, and it might take a couple more years to find out.
Saying that, analysts still appear confident over the dividend. They’re forecasting 5.4% this year, and about the same again next year. That does increase the attraction of the depressed share price for me.
Sainsbury’s is on my ‘buy’ list of candidates for the rest of the year. But, right now, Tesco would be my sector choice.