Sainsbury sees 3Q profit at top end of guidance range after strong Christmas

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By Geoffrey Smith 

AiVIF.com -- J Sainsbury (LON:SBRY) said it expects profit and cash flow to be at the top end of its forecast range in the year through March, after a strong Christmas season for its core grocery business.

Like-for-like sales growth excluding fuel; accelerated to 5.9% on the year in the three months through December, from 3.9% in the previous quarter, as lower fuel prices and waning demand for consumer durables left consumers free to concentrate on stocking their larders.

The numbers add to evidence that the latest wave of inflation in the U.K. has been driven as much by companies expanding their profit margins as by higher input costs. Economists argue that this type of inflation is generally more likely to reverse quickly when the economy slows, as is currently the case. 

As a result, the group said it expects full-year underlying pretax profit "to be towards the upper end of the guidance range of £630 million to £690 million," (£1=$1.2169). Cash flow is now expected at around £600M, up from previous guidance of at least £500M.

However. the numbers weren't enough to stop Sainsbury's shares falling at the open, after a rally that has driven them to their highest in nine months. Analysts said the numbers were flattered by £15M in financing costs, much of which has already been given away in the form of higher wages.

By 03:15 ET (08:15 GMT), Sainsbury's stock was down 2.4%. 

There was a sharp divergence in performance between the core supermarket business and its Argos household goods chain. Grocery sales rose 12.5% from a year earlier, with the fastest growth seen in its low-cost and own brand goods, as customers balked at higher prices for recognized brands. By contrast, its general merchandise sales were down over 15% and Argos' sales were down 5.0%. 

The company's numbers also reflected the decline in fuel prices during the quarter. Fuel sales were up only 16.2% year-on-year, after growing at a clip of over 24% in both of the previous two quarters.