Is Now The Time To Buy Sainsbury’s Shares After Its Q1 Update?

Sainsbury’s shares (LON:SBRY) are down 1.6% today despite a solid set of Q1 figures this morning. Having failed to breach the 300p ceiling in more than 18 months now, here’s whether this could be the start of a broader rally.

Tasteful Numbers

As a whole, Sainsbury’s posted quite a decent update, smashing expectations across the board. Total sales were up 2.4% to £10.04 billion – beating both last quarter’s (+2.2%), and last year’s (+2.1%) growth rates. That being said, this quarter’s showing was due to a slight inflationary tailwind, as both grocery and non-food inflation have rebounded over the past few months.

Diving into the numbers, Sainsbury’s grocery business grew 4.9% to £7.34 billion – higher than consensus of 3.8% and even Kantar’s estimate of 4.6%. That said, this isn’t a surprise when looking at its customer satisfaction scores. With the biggest Aldi price price commitment in the market of over 800 products, its value for money score hit an all-time high, leading to Sainsbury’s hitting its biggest market share in almost a decade.

Sainsbury’s own General Merchandise + Clothing (GMC) business didn’t disappoint, either, with growth of 4.2% to £455 million, also beating consensus’ 3.2%. The strong showing can be attributed to a combination of good weather as compared to last year, as well as improved designs and availability in clothing. This resulted in Tu’s sales outstripping the market with an 8.0% increment, led by a 13.0% jump in womenswear.

GMC’s performance carried through to Argos, too, where growth of 4.3% to £1.13 billion was also ahead of a very competitive deflationary general merchandise (GM) market, helped by easier comps from last year’s dismal -7.7%. Warm weather also played a part, and was boosted by an improvement in value perception. On the flip side, fuel sales saw another quarter of negative growth (-13.6%) to £1.11 billion, as petrol prices slumped.

Be that as it may, it’s worth highlighting that all three of Sainsbury’s retail businesses are now posting positive volumes for the first time in over 2 years, with sales growth (+4.9%) outpacing the average inflation rate (+3.9%). As such, it was assuring to see CEO Simon Roberts reiterating his guidance for FY26. He continues to expect retail EBIT of around £1.00 billion, with retail free cash flow of more than £500 million.

Super Recovery To Come?

Having said that, much of the attention on the earnings call was focused on Argos. The main general merchandise arm of the group has acted as a laggard in the conglomerate’s numbers over the past couple of years with negative growth due to the intense competition in the GM market. Thankfully, however, things look to finally be turning a corner after several quarters of markdowns and de-stocking.

The division is starting to make encouraging strides with its More Argos, More Often strategy. Online customer journeys have been more tailored and personalised, thereby driving higher participation. As a result, there was an uptick in online customer traffic and basket sizes, which is encouraging given the cautious spending environment.

A turnaround isn’t going to come easy, though, with a couple of stumbling blocks to consider. Most prominently, Argos’s performance has been very reliant on the weather. According to Roberts on the call, approximately a third of its sales are attributable to seasonality. Therefore, bigger-ticket items haven’t been performing as well, and has been made worse by the decline in footfall in its physical stores.

Nonetheless, the lower footfall can be attributed to the impact of the FTSE 100 constituent’s store closure programme in order to shore up its margins. Hence, provided the weather cooperates again this summer, there’s reason to believe that Argos’s margins can rebound faster-than-initially expected. This is because its smaller-ticket items which have been outperforming, tend to yield higher margins.

But for investors who are wary of the susceptibility of Argos’s sales to the unpredictable nature of the weather, the team is ramping up its efforts to expand its products to include stockless ranges. This effectively turns Argos into more of a marketplace, thereby reducing the risks of inventory bloating and markdowns seen in previous quarters, which should make sales growth less volatile.

More for More

I’m of the opinion that Sainsbury’s is laying the foundations for a stronger future, which will be spearheaded by three pillars – space maximisation, Argos restructuring, and Nectar’s enhancements. While profit progress in FY26 will likely be bogged down by the £140 million worth of employers’ national insurance and living wage hikes, there’s reason to believe that a healthy amount of growth in the pipeline is yet to be realised.

As the effects of space maximisation towards higher-profit items like food come into play towards the end of the year, along with Argos’s optimisation, and the grocer’s £650 million cost savings programme, margin expansion should occur going forward. This should also be further complemented by the success of Nectar Prices, as it’s likely that the portion of supplier-funded promotions can help with margins even more.

Moreover, the resilience of the supermarkets’ premium own-brand line, Taste the Difference which saw sales growth of 18.0% should serve as an additional tailwind. These products yield strong margins, and with consumers also shifting towards stay-at-home habits, I anticipate this line to continue its outperformance.

Thus, I have Sainsbury’s underlying earnings growing at a CAGR of 6.2% through to FY28, with EPS reaching 27.2p by then – in line with the current consensus. This, therefore, brings the stock’s PEG ratio to 2.1 – in line with its 5-year average. However, what makes the stock undervalued in my view, are two things – its current EV/EBITDA and its booming forward dividend.

With an EV/EBITDA ratio of 4.7, Sainsbury’s shares are still lagging behind its sector (10.6) and 5-year averages (7.2). But more lucratively, the corporation is set to pay £250 million in special dividends equating to roughly 10.5p per share. Combined with a forward dividend yield of up to 16.4p, and the stock has a stunning yield of as high as 9.4% today. On that note, I see upside of 17.7% for the stock, with a price target of 320p.