TV dinners boost profits at Sainsbury's

(BLOOMBERG)

Sainsbury's is banking on continued demand for its top-end food range and and the results of its expansion drive to overcome the challenging economic environment.

Justin King, the chief executive, said the supermarket group's relaunched "Taste the Difference" range had seen double-digit sales growth as consumers opted to eat in front the TV instead of heading out to restaurants.

"People are staying in rather than going out to eat," he said. "People are watching the X Factor (and other TV shows)... but they are eating well while they're doing it."

The update came as the FTSE 100-listed group posted pre-tax profits of £466m, up 36 per cent, for the 28 weeks to 2 October. The number of customers shopping at the group's stores rose to more than 20 million a week – one million higher than last year.

Total sales including VAT were up 7 per cent at £11.9bn, while basic earnings per share rose by 33.6 per cent to 18.7p. The interim dividend was increased by 7.5 per cent to 4.3p.

The figures come against the backdrop of an expansion drive as Sainsbury's added 540,000 square feet of new floor space during the period, opening or extending 29 stores.

Mr King said the group remained on course to hit its target of 15 per cent growth in floor space over the two years to March 2011.

Looking ahead, he added: "As we enter the second half, we expect the economic environment to remain challenging. We remain confident that our universal customer appeal, combined with our strong space growth momentum, means we are in a good position to perform well in this environment."

The results follow recent industry data showing that Sainsbury was outpacing its rivals. The group saw sales growth of 6.1 per cent over the 12 weeks to the end of October, according to figures from market researchers Kantar Worldpanel. That compares to 3.8 per cent for Morrisons, 3.7 per cent for Tesco and 3.4 per cent for Wal-Mart-owned Asda.

"The large customer base of the top four retailers means they must strike a balance between price and quality... Sainsbury's has hit a sweet spot with this balance and this is reflected in its continued growth," Edward Garner, Kantar's communications director, said.

Despite the strong performance, some analysts were cautious about the response in the supermarket's share price. "The [J Sainsbury] story is a compelling one and management is doing nothing but deliver," Jonathan Pritchard, an analyst at Oriel Securities, said. "However, given the lofty valuation, we are unsure whether the shares can truly kick on from here and emulate the progressive steps that the company is making."

Mr Pritchard's view was echoed by Richard Hunter, head of UK equities at Hargreaves Lansdown stockbrokers. "The Sainsbury investment case remains a difficult one to call," he said. "The shares have had a good run of late, rising 21 per cent over the last six months, during which period the wider FTSE 100 has gained 9 per cent." Last night, Sainsbury's shares fell in line with the blue chips as a whole, easing by 4p to 373.2p.

Besides the valuation, Mr Hunter also highlighted the "overhang" of the 26 per cent stake owned by Qatar Holdings, which is often mooted as a possible bidder after abandoning an attempt in 2007.

"From an investment perspective, the overhang of the Qatar stake is a constant weight on the shares, despite some vague recent speculation to the contrary," he said.