Sainsbury’s H1 earnings preview: Where next for the Sainsbury’s share price?

When will Sainsbury’s release H1 earnings?

Supermarket Sainsbury’s is scheduled to release interim results covering the six months to September 9 on the morning of Thursday November 3.

Sainsbury’s H1 earnings consensus

Consensus numbers from Bloomberg show markets believe Sainsbury’s will report 3.5% growth in revenue in the first half of the financial year to £16.3 billion. Underlying pretax profit – its headline measure – is expected to decline 11% from last year to £330.8 million, while statutory pretax profit is forecast to drop 49% to £274.3 million.

Sainsbury’s H1 earnings preview

Sainsbury’s and its competitors are vying to offer the best value to cash-strapped customers and sacrificing profitability as a result, but the company’s exposure outside of grocery, which has grown in recent years since its acquisition of Argos, looks set to bite when it reports results this week.

Revenue growth is expected to be solely driven by a tepid 0.6% rise in grocery sales (excluding fuel), countering a 6.3% drop in clothing sales and 7.5% decline in general merchandise.

The rise in grocery sales will be mostly if not completely driven by inflation-driven price increases rather than volumes. Although Sainsbury’s says it still has a larger volume market share now than it did before the pandemic, it has seen its grocery market share dwindle by over 1% since the start of 2020 according to Kantar as discounters Aldi and Lidl, as well as smaller rivals like Co-op, Ocado and Iceland, continue to gain ground on the larger firms. We saw Aldi overtake Morrisons to become the fourth largest supermarket in the country just a month ago.

Price has been the main weapon wielded by supermarkets for decades, but the current cost of living crisis means that a reputation for value has never been more necessary. Sainsbury’s is investing over £500 million over the two years to the end of March 2023 in keeping its prices low with the ambition to raise prices slower than its rivals, and hopes to fund it through cost-savings. This is underpinned by its Aldi Price Match and its Price Lock that keeps prices reliably low for consumers.

Clothing sales are forecast to fall because they are stabilising from volatile periods over the last couple of years. Sales jumped over 33% this time last year as Sainsbury’s reaped the reward from other retailers being closed, but that has provided tougher comparatives this time around.

The bigger concern is general merchandise, which is underpinned by Argos. It too has been dealing with uneven comparatives as demand rose during the pandemic and is now unwinding, but the 7.5% drop in first half general merchandise sales comes after a 5.8% drop the year before. There are also concerns around demand going forward, particularly for big ticket items, as consumers tighten their belts and brace for a recession.

Its retail underlying operating profit – which encompasses profits from groceries, general merchandise and clothing – is forecast to drop 10% to £470.5 million in the first half. That will be the result of tighter margins, driven by cost increases across the board and greater exposure to Argos.

Notably, the UK’s biggest supermarket chain Tesco said its decision to delay passing on higher costs to customers hurt profits when it released results around a month ago, when it too reported a 10% drop in underlying retail profits in the six months to August 27.

Sainsbury’s is aiming to deliver underlying pretax profit of £630 million to £690 million over the full year, down from the £730 million delivered last year when profits more than doubled. Analysts currently believe it will deliver earnings toward the lower-end of that range to suggest some think the guidance could be at risk, and this will heighten the pressure to keep a grip on costs.

Notably, Sainsbury’s in the process of buying 21 stores from its joint venture partners, which should close in late 2023 or early 2024. The company was hoping to part-fund this deal by selling 18 of its supermarkets to LXi REIT and leasing them back, but this deal fell apart because LXi would have needed to raise equity to fund the deal and felt markets were too volatile to proceed. Sainsbury’s said it has a ‘wide variety of alternative options’ to finance the transaction, so keep an eye out for any update.

Where next for the Sainsbury’s share price?

Sainsbury’s shares have rallied 18% since hitting their lowest level in decades in October, but can it keep up the momentum?

The stock has recaptured the 200p mark today for the first time in almost two months and investors are hoping it can continue to climb to retake the 204p threshold that is currently aligned with the 100-day moving average and the level of support we saw in June. From there, 213.50p comes into view. The RSI has been thrusted into bullish territory in recent weeks and the 5-day average-volume-at-time sits over one-fifth higher than the 100-day average.

Notably, the 13 brokers that cover Sainsbury’s see limited upside potential from current levels with the average target price of 212.50p suggesting the stock can only climb another 5.5% from current levels. The stock has struggled to surpass the 100-day moving average over the last 10 months so this could be the first real test. Any renewed pressure could see the stock fall back toward 181.50p, which acted as a short-lived level of support last month but is also in-line with the lows seen in the second half of 2020.

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