Earnings season: Sainsbury’s figures sparkle, but would I invest?

January kicks off the earnings season for retailers. First out of this block Sainsbury’s‘s (LSE: SBRY ), which reported numbers today for the all-important Christmas period.

Trading highlights

For the 16-week period ending January 7, 2023, wholesale sales rose 5.6% over the same period last year. The six-week Christmas period was up 7.1%. However, 0.9% of the figure reflects Boxing Day trade. In 2021, the store is closed that day.

What has become very clear is that as the cost of living rises, shopping habits change. People plan ahead, buy non-perishables ahead of time. However, some of these trends may come at an unusual time in the World Cup.

Amazingly, sales of premium Taste the Difference are growing by 10% year over year. In this range, sales of mince pies rose 22% and panettone 49%. It also enjoys record sales for champagne and prosecco.

However, Sainsbury’s is not just about food. Argos makes a small, but not insignificant slice of sales. For the six weeks to Christmas, sales growth among general merchandise was 7.4%. In particular, sales of technology products were particularly strong, driven by better availability and promotional activities during the World Cup.

For the full financial year, it expects profits to be near the top end of its guidance range of £630m to £690m. Retail free cash flow is expected to be around £600m, ahead of previous guidance of £500m.

The pressure is rising

Sainsbury’s is being squeezed from all angles. It’s no secret that big supermarkets have been losing out to budget chains for some time. This trend seems to accelerate around Christmas.

Data on grocery volume changes for the four weeks to December 25 shows that Sainsbury’s is losing ground to Aldi and Lidl. However, rates are slowing. Although both offer a fraction of the range, they have added millions of new square meters of space. I expect this trend to continue.

Behavioral changes among customers lead to changing basketball dynamics. In particular, this includes switching to Sainsbury’s own brand products as well as moving from fresh to frozen. The emphasis on value has never been more important.

In response, the company is investing £550m in pricing initiatives. These include Aldi Price Match and Price Lock. There are signs that this investment is starting to pay off. Nielsen panel data highlights that Sainsbury’s has consistently expanded its market share in the products it buys the most. Indeed, it has increased the price index against Aldi by 400 basis points in 18 months.

The investment case

Sainsbury is what I would describe as a classic defensive play. As a consumer staple, I don’t expect these profits to fall off the cliff if a recession occurs in 2023. However, I remain convinced that it is a good investment.

I can certainly make a case. Profits are higher than before the pandemic. It is a strong cash-generative business and sports a high dividend yield FTSE 100 average.

That said, to me it seems like a constant game of holding onto the German chain. The fact that one of their main slogans is Aldi Price Match demonstrates my point here. I will not invest.