J Sainsbury PLC (LSE:SBRY) impressed investors and analysts with its first-quarter update on 1 July as price positioning at its grocery business led to the largest market share for the chain since 2016.
The performance of the core grocery business was the highlight for UBS, which noted that the 16-week sales growth of 5.0% was better than the top end of City estimates.
On average, analysts forecast 3.8% grocery growth, with the FTSE 100 company saying the key was improved price position against all key competitors in the quarter, helped by its Nectar prices and Aldi Price Match.
Second, having been under pressure in recent month, the Argos business looks "on the mend", UBS said, with sales up 4.4% to beat expectations, helped by warm weather and soft comparatives from last year as it gained share in a tough market with deflation.
Third, full-year guidance was reiterated, weighted to the second half as previously guided.
The first quarter has "historically been the second most important quarter", UBS said, so that performance "well underpins the guidance", with improving price competitiveness providing reassurance.
Looking forward, the Swiss bank predicted: "Continued strong trading momentum in a rational market could drive upside to the profit outlook."
Similarly, house broker Shore Capital noted that leading grocery figures say the UK grocery sector is "very competitive, but rational".
In retail, a "rational market" refers to a situation where competitors broadly align their pricing strategies rather than engaging in aggressive price wars or deep discounting.
Industry inflation is currently 3-4%, with Shore Cap saying that Sainsbury's is raising prices below the market.
A revitalised rival in the form of Asda is "a new dynamic" for the sector and has "caused some equity investor nervousness," the house broker added.
So far, and on an ongoing basis, Shore Cap said, "we do not envisage irrationality" - ie severe discounting - from Asda exec chair Allan Leighton et al, "albeit we do sense that it is an already more formidable competitor".
Analysts at Third Bridge felt Sainsbury’s growth of market share was from "riding on Tesco’s coattails", with the chain's historically higher customer loyalty "solidified" by improving price perception.
However, looking ahead, they said Sainsbury’s faces pressure from multiple fronts, with stores looking "tired", competition from discounters Aldi and Lidl at the bottom end, while premium occasions are slipping toward Marks & Spencer, and online customers migrating to Ocado, currently the fastest-growing UK grocer.
"Our experts highlight the significant crossover between Tesco and Sainsbury’s shoppers, a dynamic that leaves Sainsbury’s exposed if Tesco continues to execute well across convenience and digital channels."