Sainsbury's: Growth Momentum Continues With Volume Growth and Market Share Gains

J Sainsbury reported a first-quarter fiscal 2024 trading update with like-for-like sales growth up 9.8%, excluding fuel sales. Grocery sales growth was 11%, clothing was negative 3.7%, and Argos was up 5.1%. Grocery performance continued to recover sequentially (up 7.4% in fourth-quarter 2023, up 5.6% in third-quarter 2023, and up 1.2% in second-quarter 2023), along with general merchandise sales aided by Argos. Argos' sales growth held up well, up 5.1% versus 9.3%/4.5%/1.6% in the fourth/third/second quarters and down almost 21% in first-quarter fiscal 2022. Sainsbury's price lock commitment covers over 2,000 everyday products, which we believe along with Aldi's price match scheme on roughly 300 high-volume fresh food products, is central to enhancing the value perception gap with competitors. The grocer has also been investing aggressively (GBP 60 million) since March in targeted price cuts (versus price increases for the market, according to Sainsbury's) across more than 120 essentials like bread, milk, and pasta. We believe Sainsbury's current strategy and execution, along with its already strong online capabilities, place the grocer in a strong position in an increasingly competitive U.K. grocery market. The grocer is already reporting a return to positive volume growth and market share gains across the grocery business and general merchandise market with Argos. Guidance for underlying profit before tax of GBP 640 million-GBP 700 million versus GBP 683 million in our model in fiscal 2024 remains unchanged. We don't expect to change our GBX 278 fair value estimate and no moat rating. Shares are fairly valued.