The J Sainsbury (LSE:SBRY) share price has been on quite a roll. Since October 2022, the supermarket retailer has seen its market capitalisation grow by more than 60%! And while performance over the last 12 months has been a bit more muted, today’s (7 February) update from management suggests further upward momentum is on the horizon.
A new strategy for a new Sainsbury’s
Following the outbreak of the pandemic in 2020, management launched its ‘Food First’ strategy. It was implemented by then-new CEO Simon Roberts. And it ultimately led Sainsbury’s to successfully navigate the pandemic, cut costs, and retake some of its lost market share.
But even after the conclusion of this programme, Roberts isn’t done optimising the company. He’s just launched the new ‘Next Level Sainsbury’s’ strategy, which seeks to deliver another £1bn of annual savings by introducing new technologies and improving operating infrastructure.
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Beyond cost reduction, Sainsbury’s is striving to achieve industry-beating growth, higher customer and worker satisfaction, and an annual free cash flow of at least £500m a year over the next three years.
Needless to say, if successful, that’s terrific news for investors. Of course, hitting these targets by the deadline of March 2027 requires a bit of investment. After all, adding electric vehicle (EV) recharging stations to attract more customers into stores, as well as introducing additional Nectar loyalty perks, doesn’t come cheap.
As such, the company anticipates its annual capital expenditure will rise to between £800m and £850m to implement these changes.
However, in the November 2023’s interim results, investors were pleased to see better-than-expected performance along with an upgrade to the full-year outlook. Therefore, Sainsbury’s seems to have the financial flexibility to commit to such expense.
And management’s confidence is only further amplified by the fact they’ve also committed to returning £200m to shareholders through dividends and buybacks over the next 12 months.
Time to buy?
Since Roberts moved into the corner office, sales have grown by almost £2.5bn. That’s quite an impressive feat for a mature industry titan. And it’s certainly an encouraging sign he’s making the right decisions to elevate the business.
This growth appears to be one of the primary driving forces behind Sainsbury’s strong share price performance. So it’s not a surprise to see the company double down on achieving more top-line expansion in its new strategy. However, when it comes to earnings, investors are still left wanting.
Operating profits have been fairly stagnant lately. And that’s despite already implementing various cost saving initiatives. With a further £1bn in savings a year, margins may finally start to improve. But it’s not the only retailer looking to optimise operations. As such, relative to its peers, this efficiency advantage may not be as powerful as hoped for.
There’s no denying that today’s trading update is an encouraging bit of progress. But whether it’s enough to merit another 60% jump in valuation has yet to be seen. Therefore, I’m keeping this business on my watchlist for now.
