Sainsbury's bumper Christmas for food offset by weakness elsewhere

By James Davey

LONDON (Reuters) -Strong demand for luxury foods like dry cured gammon, steamed buns and chocolate desserts helped Sainsbury's outperform the UK grocery market at Christmas and stick with its annual profit forecast.

However, shares in Britain's second-biggest supermarket group sank 5% on Wednesday, with investors disappointed by the lack of a profit upgrade and weak general merchandise sales.

That reduced the stock's gains over the past year to 18%, after it hit levels not seen since 2021 on Tuesday.

One of Sainsbury's top 30 investors described the update as "a small disappointment", noting some analysts had been forecasting annual profits above the company's stated range.

"Underlying, you've got a really decent performance in grocery," he added.

Sainsbury's, which with a 16% share of Britain's grocery market trails only Tesco, said its like-for-like sales, excluding fuel, rose 7.4% over the 16 weeks to Jan. 6, as its ability to sell more products outweighed lower inflation.

Grocery sales rose 9.3%. But general merchandise sales, including those at its Argos chain, fell 0.6% in a "highly promotional" market, while clothing sales fell 1.7%.

In grocery, the group said it benefited from new product launches that tapped into a trend of cash-strapped consumers wanting to cook and entertain at home rather than eat out.

"We've served more customers, more often, with bigger baskets across the whole of their grocery shop and that really is why we're winning," CEO Simon Roberts told reporters.

Sainsbury's strong performance in food contrasts with industry data, published on Tuesday, showing lacklustre retail sales around Christmas, which may add to concerns that Britain's economy has tipped into a mild recession, less than a year before a likely national election.

Shoppers have had to contend with high inflation and interest rates at a 15-year high of 5.25% in response to the jump in prices.

Sainsbury's is benefiting from matching discounter Aldi's prices on key items and providing better prices to members of its Nectar loyalty scheme, financed by taking 1.3 billion pounds ($1.7 billion) of costs out of the business in the three years to the end of March.

The group launched over 370 new products in the quarter, including over 170 in its premium 'Taste the Difference' range, where sales soared 13%.

Sainsbury's said it still expected 2023/24 underlying pretax profit of between 670 million and 700 million pounds versus 690 million pounds in 2022/23.

The group, which plans a strategy update on Feb. 7, is closely monitoring disruption to shipments through the Red Sea and is in regular contact with the UK government.

($1 = 0.7873 pounds)

(Reporting by James Davey; Editing by Alexander Smith and Mark Potter)