To the relief of British households, grocery price inflation is falling. The jury is still out on whether the big four supermarkets have avoided repeating past mistakes in handing over more market share to the discounters.
Yet J Sainsbury seems to be balancing pricing with profits better than it did during the last great financial downturn. The chain may not seem a likely place for hard-pressed shoppers to search for value, but it has taken share from the likes of Aldi and Lidl back for the first time, according to Simon Roberts, Sainsbury’s boss.
It means that underlying pre-tax profits this year are expected to come in at between £670 million and £700 million, at the upper end of the guidance range. Retail free cashflow is also set to be £100 million higher than anticipated, coming in upwards of £600 million.
Grocery sales were up 10.1 per cent on a like-for-like basis over the first six months of the year. That was not all price inflation, either. Volumes were positive across both the first and second quarter, with the chain raising prices at half the headline rate of inflation, which ranged from 19 to 12 per cent between April and September. Annual comparisons will get tougher during the second half of the financial year. But then, the extreme level of price rises over the past 18 months is a burden on consumers’ spending. Deflation is equally damaging to profit margins. So there could be further recovery in sales volumes to come later in the financial year.
Easing inflation might also help in improving the group’s margins. Both labour and energy costs are “well up”, according to Roberts. The adjusted retail margin declined to 2.91 per cent in the first six months, down from 2.95 per cent a year earlier.
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The balance sheet is in better shape, too. Net debt including lease liabilities is £701 million lower year over year at £5.64 billion. Balance sheet strength for Sainsbury’s as well as Tesco, relative to private rivals like Asda, could help the publicly listed supermarkets compete more aggressively on price.
Still, analysts at Jefferies think the leverage at the top end of its target range will mean that the group will be happier building cash balances rather than considering handing back capital to shareholders.
Sainsbury’s has long trailed its main rival Tesco in the valuation stakes. An enterprise value of 5.4 times forecast earnings before interest, taxes and other charges is beneath a multiple of 6.4 for Tesco.
The grocer historically has been slower than Tesco in reducing its cost base, but that now gives Sainsbury an additional line of defence against elevated energy, wage and freight expenses. Savings have come from cost-cutting, including reducing the standalone Argos store estate and integrating its Argos and Habitat logistics and supply chains. It has cut £1.1 billion in costs from a target of £1.3 billion by the end of March.
Argos brings greater exposure to discretionary spending. General merchandise sales were “much tougher” this summer. Like-for-like Argos sales were down 2.6 per cent in the second quarter, while clothing sales for Sainsbury’s Tu were a bigger problem spot. But the trajectory for grocery sales, which account for 80 per cent, is more important.
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The emergence of the conglomerate, Bestway Group, on the shareholder register at the start of this year has fuelled speculation over whether Sainsbury’s could become a takeover target. The owner of Costcutter Supermarkets Group has increased its stake north of 4 per cent. That is still half that of Daniel Kretinsky, the Czech billionaire. If volumes continue heading north, there is a chance other investors will also see the value in Sainsbury’s.
ADVICE Buy
WHY The shares seem undervalued given its gains in the market share
Trainline
Trainline has struggled to catch a break. In its four years on the London market it has been hit by Covid lockdowns, a now seemingly permanent shift to hybrid working and rail strikes that are back with a vengeance.
Yet the ticketing app has defied the odds since the start of this year. Net ticket sales were up almost a quarter, which pushed revenue ahead by a fifth after stripping out commissions to the train operators.
Both metrics are now expected to be at the upper end of the guidance range this year at between 17 and 22 per cent and 15 to 20 per cent, respectively.
The balance sheet is also in a much better place. An improvement in cash generation has meant net debt has been paid down to £37 million at the end of August, equating to a leverage multiple of just 0.7 times adjusted earnings.
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Consumer travel in the UK, its largest market, has fully recovered to pre-pandemic levels, according to Jody Ford, the chief executive.
Net ticket sales for this business were up 19 per cent at £1.7 billion, with further recovery in demand easily offsetting the £5 million to £6 million it reckons it lost to rail strike days. Commuter travel is unlikely to fully get back to pre-pandemic levels, Ford reckons.
Even after a 12 per cent results’ day bounce, the shares still trade below the 350p float price.
Trainline started from a high base. Its shares had been priced for racy growth and it still has an enterprise value of 12 times forecast earnings before interest, taxes and other deductions.
That is one potential obstacle for investors. Another is the level of investment being ploughed into expanding in international markets. A decision to pause spending in France meant marketing cost growth of 15 per cent was behind the rise in net ticket sales. However, there is still no date for when the international business, predominantly Italy and Spain, will become profitable.
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The door has also been left open to revive spending in France, once the market becomes more competitive among train operators, and also enter new markets like Germany. That could cause margins to come under pressure.
ADVICE Hold
WHY Solid ticket sales are already priced into the shares
