Strong H1 for Sainsbury's, but Guidance Disappoints; FVE Maintained

J Sainsbury reported half-year results with like-for-like sales growth (excluding fuel) up 0.3% (6.1% including fuel). Growth was driven by grocery (up 0.8%, up 9.1% on a two-year basis) and clothing (up 9.2%, up 9.1% on a two-year basis) sales while the general merchandise category and Argos were down 5.8% and 7.3%, respectively. Grocery performance slowdown was largely expected as the benefit from increased food-at-home consumption trends starts to normalise (up 0.8% in the second quarter versus 5.1% same period last year). Online sales continue to be particularly strong, growing 13% year on year (up 128% on a two-year basis), with productivity of online fulfilment improving; picking rates and basket size were higher than two years ago. More important, Sainsbury's said that it gained volume share versus the broad grocery market. Sainsbury's latest Price Lock commitment covers over 2,500 everyday products, which we believe along with the Aldi price match scheme is central to improving the value perception gap with competitors. After the failed merger with Asda, we had highlighted the need for Sainsbury's to proceed to a "Tesco-like" restructuring, reinvesting the savings to its offering through price cuts. We believe the current strategy and execution along with the grocer's already strong online capabilities place Sainsbury in a prime position to compete in the increasingly competitive U.K. grocery market.