J Sainsbury PLC (LON:SBRY) shares rose modestly on Wednesday as it said grocery sales growth slowed slightly in the past nine weeks but general merchandise has improved strongly, helped by the reopening of Argos stores after the coronavirus shutdown.
For the extended 16-week first quarter as a whole to June 27, total supermarket sales were up 8.5% compared to the same period last year. Like-for-like sales were up 8.2%, excluding fuel, or down 2.3% if including fuel.
Total grocery sales were up 10.5% for the quarter, with the 12% growth for the 7 weeks to April easing to 10%. General merchandise sales picked up to 12% in the latter weeks from 3% before, while the decline of clothing sales was just 10% in the past nine weeks compared to 53% in the first seven.
The FTSE 100 grocer reiterated that the impact on profits of the coronavirus pandemic is expected to be more than £500mln, which it expects to be “broadly offset” by the stronger grocery sales and business rates relief of roughly £450mln.
New chief executive Simon Roberts, who took over from Mike Coupe on June 1, said: “The last four months have been extraordinary in so many ways and our colleagues have done an amazing job adapting our business.”
The business has “changed fundamentally” from four months ago, he added, with weekly online grocery sales more than doubled in recent weeks and the SmartShop app that lets customers scan their own groceries and use a separate checkout now accounts for 37% of sales on average and more than half of sales in some supermarkets.
Roberts acknowledged that some of the strong performance for food and seasonal categories in Argos was boosted by warm weather, but that sales of clothing and fuel and trading in city centre convenience stores were all significantly down year on year as a result of lockdown.
"The coming weeks and months will continue to be challenging for our customers and our colleagues and we do not expect the current strong sales growth to continue,” he said.
“A number of the decisions we have made have materially increased costs but meant that we have done the right thing for our customers and set us up well for the future.”
In mid-morning trading, Sainsbury's shares were 0.14% higher at 209p, easing back from an earlier session high of 216p.
Sainsbury will be well-placed to benefit
Looking at the update, Richard Hunter, head of markets at interactive investor commented “The pandemic has not been a guaranteed slam-dunk for the supermarkets as many assume, but if managed correctly, the benefits can be significant as Sainsbury has shown in this update.
"The changes in consumer behaviour have been of particular benefit to Sainsbury’s in online sales, where the group had a strong established presence. In the period, grocery sales online surged by 87%, with the click and collect service also enjoying a 13-fold increase.
"At the same time Argos, which became an online-only retailer for the period, continued to make its contribution. Increased sales of 10.7% were driven by demand for garden goods, PCs, gaming, and home office furniture among others. These were also fulfilled by the click and collect presence of stores where there is either an Argos outlet, or at collection points in other Sainsbury stores. Alongside this option, home delivery sales also saw an increase of 78%."
He added: "If the pandemic has marked a sustained change in consumer behaviour, Sainsbury will be well-placed to benefit. In particular, its digital capabilities and the possibility that shoppers might lean more towards the click and collect option in future would play directly into the group’s hands in a way which few competitors could emulate. Even within stores, the 'SmartShop' self-service option is beginning to represent a significant proportion of purchases made.
"Another traditional strength of Sainsbury’s has been the convenience store format, which has held up surprisingly well with a dip in sales of just 5%. Despite deserted city centres weighing down, strong sales in neighbourhood locations have picked up much of the slack."
Hunter concluded: "In all, Sainsbury has had a largely successful quarter at it has demonstrated an ability rapidly to evolve within a new environment. Initial reaction to this progress has been positive, injecting some life into a share price performance which has remained largely unchanged over the last quarter. Over the last year, the group has displayed a rather more defensive quality, with the shares having risen 6.5%, which compares to a decline of 18% for the wider FTSE100. Even though Sainsbury may not be the preferred play in the sector, the market consensus of the shares as a strong hold could come under some upward pressure after this update.”
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