Sainsbury's results: what the analysts say

Sainsbury’s today reported a 1% drop in profit before tax for the year to 11 March, amid a “competitive and uncertain trading environment”. Here’s how leading City and retail analysts reacted to the news.

Bernstein

In its quick take on the results, Bernstein wrote: ”Underlying FY retail EBIT of £626m; 1.3% below consensus of £634m but consensus has been creeping up 2-3% in recent months. Sainsbury’s retail EBIT ex Argos of £549m; 3.9% below consensus of £571m. Underlying retail EBIT margin ex Argos fell 30bps to 2.2% in H2, 10 bps behind our expectation of 2.3%. Argos profits and integration ahead of schedule. The £72m profit contribution from Argos (ex £5m synergies) at the top end of guidance £55m-75m but and 14.3% ahead of consensus of £63m. They brought forward realisation of full £160m of synergies by 6 months.Financial services EBIT of £62m; 3.3% above consensus of £60m. “Strong profit growth” is the company’s guidance going forward, which we would read as 10%+ CAGR for next few years. Underlying EPS of 21.8p; 6.9% above consensus of 20.4p. Full year dividend per share of 10.2p likely to be 6.9% ahead of expectations in line with EPS beat.

”Focus on cash generation: Retail net debt of £1,477m, £50m ahead of our expectation of £1,527m. Retail FCF of £345m is in line with our expectation of £349m: a 7% Retail FCF yield without running down inventories or running capex at unsustainably low levels.

“High and diversified growth: 3% transaction growth in the SBRY business and many components of their growth strategy working: +8% online food, +6% convenience, +4% clothing, +2% general merchandising.

“Management continue to strike a cautious note into next year citing the competitive market and cost pressures. We expect margin pressure on food retail side to continue into H1 next year before we see the turning point from cost savings, synergies and growth in H2.”

Retail Remedy

Partner Phil Dorrell said: ”Sainsburys has reported growth in all categories except it’s core supermarket offer. Should this worry stakeholders though? If customer’s shopping habits are shifting away from that format, Sainsburys should move with them. For the time being, lost sales and profit from Sainsburys’ supermarket format is being made up in other areas, which in part, fulfil’s it’s commitment to shareholders. It is the long term share value that we need convincing on. If we were Coupe we would be very conscious that for all the ambitious plans in developing general merchandise, Sainsburys core proposition is food retailing. Sushi and patisserie does not fill a family’s fridge.”

Retail Vision

Director John Ibbotson said Sainsbury’s Argos acquisition was looking “more inspired by the day”. He added: “Incorporating the catalogue brand initially swallowed time and resources – but it has begun paying dividends that flatter these otherwise insipid results and could prove crucial in future. Argos is undoubtedly the trump card responsible for the solid increase in group sales. But while Mike Coupe will be keen to dismiss the fall in underlying profits as a blip brought on by the cost of the acquisition, this should not distract from the weaknesses in the core Sainsbury’s grocery business. The convenience and online offerings are a bright spot in an otherwise challenging picture. Food price inflation has slashed margins and Sainsbury’s continues to lose market share to both Tesco and Morrisons.

“The brand’s much-vaunted turnaround plan has been slower to show results than those of its rivals, who have successfully staunched their losses with aggressive price cuts and structural reforms.

“Argos has so far proved an effective ‘get out of jail’ card for Sainsbury’s. But with inflation biting into consumer spending and the latest retail sales figures showing that the consumption boom is waning, Sainsbury’s must get its core business in order before it comes off its catalogue crutches.”

Savvy

Alastair Lockhart, insight director, said: “Sainsbury’s results today reflect the harsh nature of the trading environment. Like its rivals it is having to contend with a slow grocery market and increasing cost inflation. However, Sainsbury’s continues to face additional challenges in the shape of a resurgent Tesco and Morrisons. It also finds its core business fighting against intense competition from Aldi and Lidl as they open more stores in Sainsbury’s southern heartland. This last point in particular should be a point of concern for the grocer as the discounters still have substantial scope to open new stores and gain new customers in the south east of England.

”Despite challenges at the food business, the retailer is still able to tell a positive story. The retailer’s core own label business continues to grow, online and convenience delivered solid growth and we believe the retailer’s removal of multi-buy promotions will benefit shopper price perceptions and ultimately sales. We also know that Sainsbury’s maintains better quality perceptions than its rivals - an important asset at a time when the ability to create points of differentiation is crucial. The question still to be answered is how to reinvigorate supermarket sales, where the retailer admitted to a 2% decline. Overall we believe Sainsbury’s has a strong proposition at its core and is well placed to return the food and grocery business to growth. Indeed Kantar today reported Sainsbury’s greatest rate of sales growth since October 2014 - perhaps an early sign of improving performance.

”The retailer’s group sales benefitted from a strong Argos performance. We remain convinced that Sainsbury’s made a shrewd move in its takeover of Argos and see substantial opportunities to integrate the two business more closely through shops in shops and to strip cost out of the combined business. Sainsbury’s is well placed to develop its position as a leading cross-category multi-channel retailer which is adapting to serve a changing, increasingly connected and convenience seeking shopper.”