Sainsbury's Earnings: Solid Q2 with Market Share Gains and Better Profit Guidance

J Sainsbury reported first-half fiscal 2024 results with like-for-like sales growth of 7.7%, excluding fuel sales. Grocery sales growth was robust at 10.1% (8.9% in the second quarter), clothing continued to underperform (negative 8.4% in the first half and down 14.6% in the second quarter), and Argos was up 1.7% (down 2.6% in the second quarter). Grocery performance was particularly strong despite healthy comps last year (up 3.8% in the second quarter of 2023). Despite the lower growth number in the quarter (up 3.3% excluding the impact of the planned closure of Argos in the Republic of Ireland), Argos' performance held up well, reflecting a continuation of market share gains. Sainsbury's investments in low prices have never been higher, which we believe along with Aldi's price match scheme on roughly 400 high-volume fresh food products, have been key drivers in enhancing the value perception gap with competitors. The grocer has been investing aggressively (GBP 118 million) in targeted price cuts (consistently inflating behind key competitors). 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 reporting consistent growing volumes and market share gains across the grocery business (gaining volume from all key competitors) and the general merchandise market with Argos. Given strong performance, management upgraded guidance for underlying profit before tax to GBP 670 million-GBP 700 million versus GBP 640 million-GBP 700 million before and GBP 683 million in our model in fiscal 2024. We maintain our GBX 278 fair value estimate and no-moat rating. Shares are fairly valued.