J Sainsbury PLC (LSE:SBRY)’s 5% fall in annual profits is merely the result of its bid to lower prices and tempt shoppers, according to analysts.
Sainsbury’s confirmed it had spent £560mln to freeze prices in the past two years in its preliminary update on Thursday, likely aimed at boosting its market share.
“This focus on value has meant that Sainsbury’s has suffered a decline in profit as it has been trying to undercut rivals in certain product lines,” AJ Bell analyst Russ Mould explained.
“That’s bad for earnings but positive for winning market share. The trick is to now keep hold of any customers it has won from rivals,” he added.
Lowering prices “could be the right move for the long-term” if customers switch, according to Hargreaves Lansdown analyst Sophie Lund-Yates, but lower margins "can’t go on forever".
Though profits have indeed been dipped into, shown by Sainsbury’s lower operating margin of 2.99%, consumers are “lapping up” the lower prices, Lund-Yates added.
The pair agreed that Sainsbury’s slight margin sacrifice could only be short-lived, though Third Bridge analyst Orwa Mohamad suggested easing inflation may naturally cause this to widen.
Shore Capital focussed on Sainsbury’s free cash flow meanwhile, which rose 26% to £635mln during the year, alongside an “attractive” unchanged 13.1p per share dividend and “scope for management to talk to further shareholder friendliness”.
Looking ahead, the bank lifted underlying pre-tax profit guidance to £660m for the coming year, similar to Sainsbury’s own forecast of £640mln-£700mln.
Sainsbury’s shares fell 0.5% to 282.6p following the update.