Sainsbury (J) plc (SBRY) Ordinary 28,4/7p

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Sainsbury’s first-half retail sales, excluding fuel, rose by 4.8% to £15.6bn. All business units were in positive territory, with the fastest growth coming from Grocery, up 5.3%.

Retail underlying operating profit remained broadly flat at £504mn, ahead of group expectations. The revenue uplift and ongoing cost-saving programme helped offset higher employment and regulatory costs.

Retail free cash flow fell by £115mn to £310mn. Net debt, including lease liabilities, fell by £0.1bn to £5.5bn.

Full-year retail operating profit guidance has been upgraded from £1bn to more than £1bn.

An interim dividend of 4.1p per share was announced, up 5.1%. A special dividend of 11p per share (totalling £250mn) will be paid on 19 December, and an additional £150mn of share buybacks were announced, to be completed by the end of its 2027 financial year.

The shares were broadly flat in early trading.

Our view

Sainsbury’s delivered another strong performance in the first half, with like-for-like sales landing slightly ahead of expectations. Improving profitability has seen guidance nudged higher, and shareholders are being rewarded with bumper cash returns thanks to the sale of its banking business.

Sainsbury's continues to gain market share, thanks to its herculean effort to improve products, value perception and innovation more generally. Things like the ALDI price match and Nectar prices are helping on this front too. They’ve been expanded across more products than ever before and are doing a great job at keeping customers loyal.

With operations focussed on this side of the Atlantic, President Trump’s fluctuating trade policies pose little threat to disrupt operations directly. But Sainsbury’s is more exposed to general merchandise than its peers through its ownership of Argos, an area where sales have been weak in recent years. We’re starting to see the benefits of these soft comparable periods and improving profitability, but the space is likely to remain challenging for some time.

The top-line growth and efficiency improvements have been enough to offset rising national insurance and minimum wage costs, keeping profits moving in the right direction. With an all-out price war failing to materialise so far, and positive momentum heading into the festive season, management has nudged its cautious profit guidance higher.

The balance sheet remains in good shape, with the ratio of net debt to cash profit (EBITDA) sitting towards the lower end of its target range. The sale of its banking operations should help sharpen management’s focus on the retail business, and has freed up £400mn to be returned to shareholders through special dividends and share buybacks over the next 18 months. With strong cash flows, there’s plenty of weight behind the group’s prospective 5.1% dividend yield. But remember, no shareholder returns are guaranteed.

Sainsbury’s deserves credit for its steady strides forward in recent times. That’s been reflected by its valuation climbing above its long-term average, which now sits more in line with peers. The income opportunity looks appealing, and there’s scope to beat profit expectations in our view, if it keeps a tight grip on costs. But we prefer other names in the sector given the tough competition and challenges at Argos.

Environmental, social and governance (ESG) risk

The retail industry is low/medium in terms of ESG risk but varies by subsector. Online retailers are the most exposed, as are companies based in the Asia-Pacific region. The growing demand for transparency and accountability means human rights and environmental risks within supply chains have become a key risk driver. The quality and safety of products as well as their impact on society and the environment are also important considerations.

According to Sustainalytics, Sainsbury’s management of ESG risks is strong.

An area of strength is the fact that the group’s executive pay is explicitly linked to ESG performance targets. However, within that, the group’s ESG disclosures aren’t in accordance with leading reporting standards, in particular the environmental policy is weak. This is significant given the group’s extensive packaging and freight usage. The group’s large scale puts it at increased risk of scrutiny when it comes to product reputation, and is something to monitor as customer appetites lean more towards sustainable options.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by LSEG. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment.

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