Sainsbury’s (SBRY) have climbed from 296p on 26 June to 336p by 2 July after a first-quarter update came in ahead of expectations. Grocery sales rose 3.6%, beating the 3.4% forecast, while like-for-like growth of 2.1% was also ahead of the 1.9% consensus.
The biggest surprise came from Argos, where analysts had expected sales to fall 2.6%. Instead, sales declined just 0.5%, helped by fan sales during the May heatwave and demand for larger televisions ahead of the World Cup.
Grocery remains the strength of the business
Sainsbury’s core grocery operation continues to perform well, with fresh food sales up 5% as shoppers bought more berries and burgers during the warmer weather, while Easter lamb sales reached a record level.
Premium ranges also continue to gain traction, with Taste the Difference sales up 6%, while online grocery sales increased 12.5%. The group is still taking market share and growing Nectar participation, which has added close to a million shoppers.
However, the pace of growth is slowing. Like-for-like sales excluding fuel rose 2.1%, down from 3.1% in the previous quarter and below the 4.6% growth achieved in the same period last year.
Argos improvement still comes with pressure on margins
Argos was the main positive surprise, but the underlying picture remains mixed. Volumes increased 2.2%, suggesting shoppers have not abandoned the brand, but average spending has fallen as customers focus on cheaper products.
General merchandise and clothing sales declined 3.7%, while standalone general merchandise fell 6.3% as Sainsbury’s continues to reduce its exposure to lower-return categories and focus more heavily on food.
The challenge for Argos is no longer attracting customers, but improving pricing power and margins as household budgets remain under pressure.
Shares have moved faster than earnings
Sainsbury’s kept its full-year guidance unchanged, with underlying operating profit expected between £975m and £1.075bn, leaving the midpoint broadly flat on last year.
That means the 14% share price rise over the past week is mainly a change in investor sentiment rather than a major improvement in earnings expectations.
The shares now trade on a forward price-to-earnings ratio of around 12.9 times, slightly above their 10-year average of 12 times. The prospective dividend yield of 4.6% is also close to its long-term average, suggesting the valuation is no longer as overlooked as it was.
The outlook depends on margins and consumer confidence
Sainsbury’s warned that the conflict in the Middle East creates uncertainty for consumer spending, while higher National Insurance and wage costs continue to put pressure on margins.
The company is still benefiting from strong grocery demand, its Aldi price match and continued market share gains, but turning sales growth into stronger profits remains the key test.
Sainsbury’s delivered the update investors wanted after the June sell-off, beating cautious expectations and keeping guidance intact. The share price recovery looks justified, but with the valuation now reflecting much of that progress, further upside may depend on evidence that margins can improve rather than just sales continuing to grow.