Source: Sainsbury’s

Sainsbury’s posted stronger than expected Q1 sales this week as grocery sales returned to volume growth, but the share price reaction was tepid due to fears of a slowdown.

The supermarket’s like-for-like sales for the 16 weeks to 24 June rose 9.8% (excluding fuel), while total retail sales grew 9.2% in the period.

Overall performance was driven by predictably strong grocery sales growth of 11%. However, Sainsbury’s surprised the market by returning to sales volume growth as it benefited from strong performance over bank holidays and warmer weather towards the end of the quarter.

Grocery growth was led by its convenience stores and supermarkets, as customers continued to return to stores. It also achieved market share gains, driven by the investment in price – most notably the launch of Nectar Prices in April – as it reinvested cost savings into customer value.

General merchandise sales were up 4%, with Argos sales up 5.1% as it benefited from strong demand and availability for electrical products, which mitigated weaker early summer seasonal performance. However, Sainsbury’s clothing sales were down 3.7%, affected by the cooler weather, with stronger sales in the later weeks of the quarter as the weather improved.

The group’s outlook for the full financial year remains unchanged. Underlying profit before tax is expected to be £640m-£700m, with at least £500m of retail-free cashflow.

Retail analyst Nick Bubb noted “eye-catching” volume growth despite double-digit inflation, and highlighted the “impressive” Argos growth amid a tough electricals market.

Nonetheless, the shares lost 1.8% on Tuesday and 0.5% on Thursday, falling from 274.6p to 268.8p.

Barclays noted quarterly sales growth would likely trend lower from the supermarket’s second quarter onwards. The broker said: “The company took pains to mention a number of factors that will make growth more challenging in the coming quarters, including lower food inflation; tougher comps, fewer ‘events’ and the full impact of Argos closing all its stores in Ireland.”

However, it concluded: “Even with the cautious comments on the sales outlook we think Sainsbury’s underlying performance is strong in grocery and GM (based on market share gains).”

Sainsbury’s shares are up almost 20% so far in 2023, but are around 7.5% down from their mid-May peak of 290p, despite the strong sales performance.