Festive Growth for Sainsbury's in Q3 and Confident Guidance in Line With Our Expectations

J Sainsbury's reported third-quarter fiscal 2023 results with like-for-like sales growth up 5.9% , aided by grocery sales growth at 5.6%, with clothing at 1.3% and general merchandise at 4.6% (Argos up 4.5%). Although the grocery performance sequential recovery was largely expected (up 3.8% in the second quarter and down 4% in the first quarter), it was the nonfood sales that slightly surprised on the upside with clothing sales up 1.3% versus down 0.2% in the second quarter and down 10.1% in the first quarter and gross merchandise sales up 4.6% versus up 1.2% in the second quarter and down 11.2% in the first quarter. Argos' sales growth was particularly pleasing, up 4.5% versus up 1.6% in the second quarter and down 10.5% in the first quarter. This is on top of a confident outlook by management, commenting on strong trading momentum in the festive period of Christmas and "volume market share gains." Sainsbury's Price Lock commitment covers over 2,000 everyday products, which we believe along with Aldi's price match scheme on now 300 (from 240 in 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's in a prime position in the increasingly competitive U.K. grocery market. Management specialised guidance toward the upper end of the range for an 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.