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UK retailers upgrade profit forecasts after strong Christmas trading

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Retailers J Sainsbury, JD Sports and Dunelm have all upgraded their profit forecasts after strong trading over Christmas helped offset problems in supply chains and rising costs.

Sainsbury’s, the UK’s second-largest supermarket chain, said it expected to make at least £720m of underlying pre-tax profit in its current financial year, up from a previous forecast of £660m made in July.

Clothing and footwear chain JD Sports said it expected full-year profit of £875m, compared with a company compiled average of analyst forecasts of £810m.

In April last year, it had predicted profits of £500m. Executive chair Peter Cowgill said that even as recently as September, the company “thought that Christmas and Black Friday may weaken us, but that did not prove the case”.

Dunelm, the homewares retailer, said sales in the 13 weeks to Christmas Day were 13 per cent higher than the previous year and a quarter above pre-pandemic levels. Full-year profit would be “materially ahead of expectations” — currently £181m — thanks to strong sales and higher margins.

Simon Roberts, chief executive of Sainsbury’s, said the company had reasoned consumers would want to celebrate with family and friends in 2021 after lockdowns the year before and adjusted staffing levels, prices and volumes in response.

For the six weeks to January 8, grocery sales were 0.1 per cent up on last year, but 6.8 per cent ahead of the same period two years ago. For the third quarter as a whole, they were down 1.1 per cent, markedly better than the 2 per cent decline expected by analysts at Citi.

Roberts said a promise to match the prices of discounter Aldi on key Christmas items had boosted volumes and shoppers had also spent money on treats, with sales of its more expensive “Taste the Difference” range rising 13 per cent.

That helped offset weakness at Argos, the group’s general merchandise business, which was affected by supply chain problems with toys and consumer electronics.

Sales at Argos fell 10.6 per cent over Christmas and 16 per cent over the third quarter, which was worse than expected. But fewer price promotions and cost savings from closing standalone Argos stores and putting them inside Sainsbury’s supermarkets meant that profit margins held up.

External factors also helped some retailers. Roberts acknowledged that Sainsbury’s benefited from more eating at home, as the spread of the Omicron variant cut spending in pubs and restaurants ahead of Christmas.

JD Sports estimated that fiscal stimulus measures in the US in early 2021 added about £100m to its annual profits. “Trading was far stronger there than we could ever have anticipated,” said Cowgill.

The round of upgrades will raise expectations that Tesco and Marks and Spencer will also report strong trading this week, with better margins and lower markdowns. Grocery industry data have already shown that Tesco and M&S expanded market share in food over Christmas.

However, inflation will be a major challenge for food retailers in 2022. “Sainsbury’s is walking the tight rope of reducing prices to be more competitive whilst also passing on inflation,” said William Woods at Bernstein.

Roberts warned that he was not expecting supply chain problems in general merchandise to ease. “There are still significant challenges in many areas,” he said.

By midday trading, Sainsbury’s was up 3 per cent and Dunelm was 6 per cent higher. JD Sports initially fell 2.6 per cent, but recovered to sit flat.

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