Sales at Sainsbury’s jumped 17% to £16.3bn in the first half thanks to the acquisition of Argos, but losses at the catalogue retailer, keeping prices down and the national living wage all dragged down the supermarket’s profits.
Here’s how the analysts reacted …
”Q2 retail LfL growth of +0.6%, 130bps below consensus of 1.9%. The fall in LfL sales growth is coming from both grocery and general merchandise. Grocery total sales growth has fallen from +3.0% in Q1 to +1.4% in Q2, despite higher food inflation. General merchandise total sales growth fell from +1.0% to -1.6% in what management describe as a ‘challenging environment’, likely due to FX driven price increases.
”Underlying H1 retail EBIT of £272m; in line with consensus of £272m this implies an operating margin of +1.9%. The 60bps fall from last year reflects consolidating the Argos H1 loss for the first time, price investment and wage cost inflation. Included within this are £23m of EBIT synergies from the Argos acquisition, slightly ahead of our estimate of £19m. Once the bank is included underlying H1 group EBIT of £306m; 1.0% ahead of consensus of £303m .
”Underlying PBT of £251m; 2.0% ahead of consensus of £246m . Underlying EPS of 8.7p; in line with our estimate of 8.8p and an interim dividend of 3.1p.
”Net debt has remained broadly stable YoY at £1,387m, in line with our expectation of £1,383m. Retail free cash flow of £494m, £168m ahead of our expectation of £326m. This positive performance on retail FCF is likely helped by seasonal working capital in H1 and we would expect some H2 reversal in working capital.
“Management’s FY expectations are in line with current market consensus of £572m of PBT. This implies an underlying margin excluding synergies, ex Argos in line with the performance in H1, rather than any improvement. Cost saving guidance for the full year has been increased from £145m to £185m taking the total of the three year programme from £500m to £540m. Guidance for the new cost saving programme staring next year has been subtly increased to ‘at least £500m’ implying an increased confidence in the delivery of those synergies.”
“The interims today from Sainsbury show that PBT of £251m was down by 9%, “reflecting previously guided price investment, wage cost inflation and consolidation of Argos H1 losses, partly offset by synergies and cost savings”. The headline is “Positive momentum across the business”, but the Q2 sales figures look a bit weak, although Argos is lumped in with the performance of “General Merchandise”. The outlook for the full year underlying profit is said to remain in line with the current market consensus of £572m, however.”
“Interestingly online and convenience sales are up - reflecting changing shopper habits. The business talks of having more customers, which is also reflective of the way UK shoppers are widening their store repertoires. So Sainsbury’s need to keep working hard to deliver the right ranges, in the right locations, with the right prices. Christmas is going to be a crucial trading period for all - and a real test of the Argos merger.”
”Sainsbury’s FY2018 interim results are slightly ahead of our expectations. However, Q2 Group LFL sales were materially slower than Q1 (2.3%) at 0.6% and behind our expectations. We see this performance as a little concerning as Sainsbury needs to deliver sound revenues to fully harvest anticipated synergies from the Argos acquisition and ongoing cost savings. Group trading profit amounted to £306m (SC forecast; £292m) with Group PTP coming in at £251m, a 9% fall (SC forecast; £241m). With management guiding to an expectation to meet prevailing consensus, following this update we are not adjusting our FY2018 PTP estimate of £585m (EPS; 19.0p) whilst we forecast a DPS of 9.5p (an implied yield of 4.1%) two times covered by EPS. Our positive stance on Sainsbury’s stock has been predicated upon the delivery of a broadly stable Grocery business and harvesting of Argos synergies. Following this update we see this scenario as being broadly on-track albeit we cannot hide concern over the Q2 trading slow down. Sainsbury’s shares trade on a FY2018 PER of 12.2x times (x) and an EV/EBITDA ratio of 5.0. BUY.”
More to follow …