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Sainsbury’s cash flow management will be vital for investors in Q3

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J Sainsbury LON:SBRY is due to provide the market with a trading statement on Tuesday. This comes at a time when there is increased pressure on supermarkets from both the consumer and the government. They are being forced to justify food prices and their overall value proposition.

Leading supermarkets are under pressure to provide more transparency on food pricing strategy as the UK faces an extended period of high inflation. Not only that, but Bestway, which owns Costcutter, moved to acquire 3.45% of Sainsbury back in January, obviously deciding the company looked cheap enough to pick up a piece of the action. Timing on that deals looks to have been excellent for Bestway.

Tough economic background for Sainsbury customers

Sainsburys will be reporting to the market with a tough economic background in the UK and yet more pressure from discount providers like Lidl and Aldi, who seem to be nibbling away at the market share of the incumbents like Sainsbury and Tesco. Analysts reckon this will put a firm ceiling on margins in the near term, and it is unclear when things are likely to normalise.

Sainsbury has implemented a cost-saving program, but will it be enough? Some investors seem to be optimistic: the share price was climbing ahead of the trading statement. It is up over 3% in the last five days of trading and still up a hefty 21% over the six month picture. The Sunday Times also tipped the stock going into this week.

Running Sainsbury through the BridgeWise data engine sheds some light on the company’s fundamentals, and how it is faring against its peers. BridgeWise is currently rating the stock an Underperform, and here’s why.

Sainsbury scores well on cash flow when we look at the fundamentals, but against the overall UK grocery sector there are issues. It does not look as healthy as close competitor Tesco, for example, when you focus on balance sheet or income factors. Even Ocado, which I remain sceptical of, has a better overall rating.

Insufficient capital controls thus far?

Having said that, management has been good at improving overall cash flow metrics and maintaining those assets already on the balance sheet. Investors should also be paying attention to the supermarket chain’s core equity metrics tomorrow morning. EBITDA and overall revenue efficiency will require some work too. BridgeWise speculates that insufficient capital controls may be at work here.

Cash flow management is going to be key in the next trading statement. This has been prudent, and likely to continue to be supportive of the Sainsbury share price if it can be maintained. The healthy change strategy being implemented looks like it will be vital if investors are going to see further gains in the stock price in 2H.

Free cash flow growth seems to be where Sainsburys is beating its peers in the sector, and you have to shop further afield than the UK to find a supermarket with better cash flow metrics (in case you are interested in raw cash flow, Iceland’s Hagar is worth a look, with its stupendous cash expenditure growth),

 

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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