Nonfood Sales Growth Ahead for Sainsbury in Q2, Continues to Gain Volume Market Share

J Sainsbury reported first-half fiscal 2023 results with like-for-like sales growth down 0.8% (up 4.9% including fuel) with second-quarter LFL sales growth up 3.7% (up 7.7% including fuel). Although the grocery performance sequential recovery was largely expected (down 4% in the first quarter), it was the nonfood sales that surprised on the upside with clothing sales slightly down 0.2% (versus down 10.1% in the first quarter) and gross merchandise sales up about 1.2% (versus down 11.2% in the first quarter). Argos' sales growth was particularly pleasing, up 1.6% from down 10.5% in the first quarter. This is on top of a confident outlook by management, commenting on strong trading momentum at the beginning of the second half and "volume market share gains." Sainsbury's Price Lock commitment covers over 2,000 everyday product, and the grocer said that it recently increased the number of own-brand products by 20% as more customers switch to own-brand products, which we believe along with Aldi's price match scheme on 240 (stable from the previous quarter) high-volume fresh food products is central to enhancing the value perception gap with competitors. We believe its current strategy and execution, along with its already strong online capabilities, place Sainsbury in a prime position in the increasingly competitive U.K. grocery market. Management reiterated guidance of underlying profit before tax of GBP 630 million-GBP 690 million versus GBP 706 million in our model in fiscal 2023. We don't expect to change our GBX 278 fair value estimate and no-moat rating.