Sainsbury’s share price in focus ahead of Q1 update
Sainsbury’s share price recently fell to a seven-month low as traders are cautious ahead of the company's first quarter trading update. The landscape has changed a lot in the past year, as the stock posted a three-year high in August 2021, but since then it has been in an aggressive downtrend because fears about higher costs have dominated the headlines.
In April, the retailer revealed impressive full year results as statutory profit before tax jumped from £278 million to £854 million, and keep in mind it registered a loss of £164 million in the year 2020/2021 due to Covid-19 related costs. Underlying profit, which strips out one-off items, saw an increase of 25% to £730 million – which is still an impressive level. Cashflow was strong as it was £503 million, but that was down on the three-year average of £633 million. Sainsbury’s, like their competitor Tesco, took the opportunity to lower its long-term liabilities. Non-lease net debt fell by £1.38 billion, which puts them comfortably ahead of the own debt reduction target. Sainsbury’s rewarded its shareholders in the form of an increased dividend. The final pay out was 9.9p, taking the full-year dividend to 13.1p, up 24%. It is a sign of how well a company is performing when it can lower its debt and boost its dividends at the same time.
Even though the business performed very well in the 12-month period, Sainsbury’s share price took a knock because the group warned about rising costs, and that it would eat into earnings. The company predicted that underlying profit before tax for next year would be £630-£690 million, while equity analysts were expecting £703 million. Rising inflation is an impacting several countries around the world, and the UK CPI rate ticked up to 9.1% - a fresh 40-year high. Fears are circulating about a cost-of-living crisis which could diminish consumers spending power as well as drive up costs for businesses, which would be the worst of both worlds for Sainsbury’s. There is increasing chatter that Britain could be on track for a recession as the economy contracted in March and April by 0.1% and 0.3% respectively. During economic downturns, shoppers typically become savvier, so we could see a situation where discount retailers like B&M, Lidl and Aldi outperform, while mid-priced supermarkets like Sainsbury’s might lose out.