J Sainsbury PLC (LSE:SBRY) did a lot right in 2023 and when it came to reporting its Christmas figures it seemed like it was continuing in the right direction.
Sales growth was strong due to strong grocery demand; its outlook for 2024 was reiterated; its ‘Food First’ strategy is coming along nicely; and it even picked three percentage points of market share along the way.
So why have shares dropped more than 6%?
Too much optimism
It should be noted that this slip comes at a time when Sainsbury’s shares are trading at two-year highs, so a drop in market value may not be as alarming as it first appears.
Additionally, optimism was already high for the stock, with industry data indicating strong grocery sales across the industry pointing to one of the best UK Christmas trading periods ever.
Even non-food retailers, ignoring JD Sports, had been celebrating strong sales in the face of poor weather and Red Sea shipping delays.
“In truth there may have been a little too much optimism with Sainsbury,” said Michael Hewson, chief market analyst at CMC Markets.
Hewson added that he believes the share price tumble wasn’t a result of poor performance but instead “slipped back on disappointment that there was no upgrade to its full-year guidance.”
Food first?
While over-enthusiasm may have been partly to blame, it’s not the sole reason.
Sainsbury’s’ subsidiary Argos may have to take some responsibility too, as sales dropped 4.2% year-on-year in the 6 weeks to January 6 2024, the worst fall of any of the group's categories.
This weighed down general merchandise sales, which fell 3.7% overall.
Management was quick to point out that the catalogue arm “outperformed a weak and highly promotional general merchandise market” and was up against “an exceptionally strong performance” in 2022.
Nevertheless, it was the strong grocery sales which ended up bailing out the weak performance from Argos and overall general merchandise.
But, what can you expect from a company whose leading strategy is ‘Food First’?
“Sainsbury’s is either leaving areas like clothing and Argos’ general merchandise offering to wither away or it simply isn’t pushing the products that people want,” suggested Russ Mould at AJ Bell.
He continued: “Sainsbury’s partially blames tough comparative figures from the previous year, yet it does feel as if Argos, in particular, has been bumped down the list of priorities for the group since Simon Roberts took over as chief executive.
“One has to question if the Argos brand is still the right fit for the grocery seller over the long term. If food is the priority, would the shop floor space currently occupied by Argos concessions be put to better use?”
What now?
Shares in rivals Tesco PLC (LSE:TSCO) and Marks and Spencer Group PLC (LSE:MKS), which both are due to report their third-quarter results tomorrow, fell back 1% and 2.3% respectively.
These drops were an indication that the market reckons both updates could suffer a similar fate to their orange competitor, said Hewson.
“Marks and Spencer shares could be especially vulnerable given that its share price traded at its best levels since November 2018 earlier this week, and already has a lot of good news priced in,” he concluded.
Sainsbury’s shares were trading at just 286p just before Wednesday's close, down 6.4%.