Sainsburys lifts guidance despite squeeze on FY profits amid price war

UK supermarket chain Sainsbury's on Thursday lifted guidance for the current fiscal year after posting a fall in 2022/23 profits as it spent £560m to keep prices low in the battle for consumers amid the cost of living crisis.

The group posted an underlying profit before tax of £690m, down 5% and at the top end of a £630 – 690m guidance range, with the decline attributed to the annualisation of Covid-19 driven grocery volume, cutting shelf prices and operating cost inflation.

Sales jumped by 5.4% to £35.15bn over the year, with grocery sales up 3%, driven by inflation and improved market share performance. UK consumers have been under pressure for more than a year by soaring inflation which has outstripped pay growth for almost all workers.

On a statutory basis, profits fell to £327m against £854m last year, impacted by non-cash asset impairments, a higher discount rate and one-off income from legal settlements in the prior year.

For the 2023-24 Sainsbury’s forecast profit of £640 -700m, ahead of an average forecast of £631m.

“Sainsbury’s has seen its full year profits fall as it invests in putting as many lower-priced items on its shelves as possible. Consumers are lapping this up, as the supermarket has been able to increase market share, which is impressive in the current environment," said Sophie Lund-Yates, equity analyst at Hargreaves Lansdown.

"(Its) proposition means it has little choice other than to get its hands dirty and fight with the likes of Tesco and slash prices to retain and attract customers. Its image isn’t high-end enough to go the other route of pushing premium."

"Attracting customers with low prices now could be the right move for the long-term as it can encourage switching from rivals. However, the degradation in margin can’t go on forever and profits are already feeling the pinch."

"However you slice it, the landscape is very tricky. The huge pullback in spending in general merchandise shows the extent of consumer nerves, and the penchant for lower-priced grocery items needs to be short lived if Sainsbury’s is going to be able to lift the margin ceiling it’s currently enforced on itself.”

Reporting by Frank Prenesti for Sharecast.com