The Purple Patch Can Continue

Despite some recent consolidation, the Sainsbury’s share price seems to have finally broken free of its 300p ceiling on the back of its interim results. In fact, I believe the stock has more room to run.

Super Half

Sainsbury’s had a relatively good half. The retailer saw its revenue grow 2.8% to £17.58 billion. Absent fuel sales, which fell 11.3% to £1.94 billion, retail sales were up a whopping 4.8%. This was driven by grocery revenue growing 5.3% to £12.79 billion. The company has been reallocating and expanding more store space towards food from its ‘Food First’ strategy – and it’s working – with its highest H1 market share in 5 years.

In general merchandise (GM), General Merchandise & Clothing (GMC) recorded sales growth of 3.3% to £804 million. This was thanks to good weather and continued strong momentum from its clothing line, Tu, as revenue grew by 7.8%. GM itself, however, remained a drag. This was the case with Argos, too, where sales increased 2.3% to £1.98 billion. However, financial services (FS) revenue did leap 14.0% to £65 million.

Sainsbury’s bottom line turned out better than expected. Despite cost headwinds, the firm’s underlying operating profit margin still ticked up 11 basis points to 2.88%. This allowed underlying operating profit to rise 6.8% to £506 million. And although underlying net finance costs were broadly stable from last year at £166 million, share buybacks spurred underlying diluted earnings per share (EPS) to jump 12.1% to 10.2p.

More In Store

Therefore, it was perhaps not a surprise to see management upgrade their outlook for the year slightly. It now expects retail underlying operating profit to surpass the £1.00 billion it had initially guided for. Additionally, the board committed to a progressive dividend policy, which will be music to shareholders’ ears, especially after declaring an 11.0p per share special dividend from its banking operations sale worth £250 million.

This will complement the 5.1% increment to Sainsbury’s interim dividend of 4.1p, given the fact that the group’s dividends have stagnated in recent years. The team also mentioned that the disposals from its bank sale will be more than expected, at £400 million. As such, it plans to use the remaining £150 million for share buybacks – an additional £50 million for the remainder of FY26 and the other £100 million for FY27.

To sweeten the deal, CFO Bláthnaid Bergin assured investors on the earnings call that a bigger buyback can be expected next year, with £300 million. This is the basis of my bullish thesis, and is probably the reason why the Sainsbury’s share price has reacted as favourably as it has been in a while – larger dividends and buybacks will enrich shareholder returns, and thereby Sainsbury’s investment case.

Doing Good Business

But shareholder returns prospects aside, there seems to be sufficient evidence to suggest that bigger returns are possible. This is because despite Sainsbury’s inflating its grocery prices behind the market, it still managed to grow both its volume and value market shares. This indicates that the volume uplifts have resulted in higher sales, with more customers shopping with bigger baskets.

Moreover, despite a largely deflationary and disinflationary GM market, both GMC and Argos have shown relatively decent momentum and improvement. These have had a positive impact on margins. And with more store retrofits and reallocation towards higher-profitability food spaces to come, the future looks bright, as value and quality perceptions continue to improve, with scores ahead of its competitors.

Despite that, downside risks remain to an extent. Particularly, the recent Budget, ridden with tax hikes has weighed on consumer sentiment. This could depress consumer discretionary spending in the short term, resulting in inventory bloating and markdowns, thereby impacting profits. Still, I think the Sainsbury’s share price is well positioned to overcome the short-term noise with its promising business prospects.