Market Share Gains and Upgraded 2022 Profit Guidance for Well-Positioned Sainsbury in Q1

J Sainsbury reported first-quarter sales with like-for-like sales growth (excluding fuel) up 1.6% (two-year growth 10.3%). Good growth performance was driven by grocery (up 0.8%, up 11.3% on a two-year period) and clothing sales (up 57.6%, up 15.5% on a two-year basis) while the general merchandise category and Argos were down 1.4% and 3.7%, respectively. Grocery performance slowdown was largely expected as the benefit from increased food-at-home consumption trends started to normalise (up 7.1% in the fourth quarter). Online sales continue to be particularly strong, growing 29% in the first quarter (up 142% on a two-year basis) with productivity of online fulfilment improving (item picking rates (IPH) increased 42% year on year and 11% on a two-year basis). More importantly, Sainsbury's said that it gained both volume and value share versus superstore competitors and broad grocery market. Sainsbury's latest Price Lock commitment covers over 2,300 everyday products with the grocer now committing to an additional GBP 50 million of price reductions across 60 everyday essentials, which we find particularly pleasing. After the failed merger with Asda, we had highlighted the need for Sainsbury's to proceed to a "Tesco-like" restructuring, investing back the savings to its offering through price cuts. We believe the current strategy and execution along with the grocer's already strong online capabilities places Sainsbury in a prime position to compete in the increasingly competitive U.K. grocery market. The grocer upgraded guidance for underlying profit before tax to be at least GBP 660 million (versus at least at the 2020 level or GBP 586 million and GBP 595 million in our model). We do not expect to materially change our fair value estimate after incorporating slightly higher guidance in our model. Shares trade in 3-star territory.