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Sainsbury - Interim results

Steve Clayton | 11 November 2015 | A A A
Sainsbury - Interim results

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Sainsbury (J) plc Ordinary 28,4/7p

Sell: 207.10 | Buy: 207.20 | Change -1.20 (-0.58%)
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Sainsbury had previously delivered an encouraging Q2 trading statement at the end of September, so these interim numbers do not hold any great surprises; even so, having initially risen on the news, Sainsbury's shares later succumbed to profit taking, falling by as much as five percent.

Our view:

The second quarter trading statement was the first undeniably positive news from a Big4 supermarket operator in years. Sainsbury may not have escaped unbloodied from the supermarket wars of recent years, but they look to be in much better shape than their main rivals. This has now been followed up by interims which confirm that Sainsbury is leading its peers.

Price Match kept them competitive at the till, even if they look to be more expensive than rivals at the shelf edge, though obviously there is a real gap still between them and the discounters. Now, their move toward lower everyday prices, with fewer promotions is improving availability, freshness and sales.

Asda's own Income Tracker survey has recently been showing a useful rise in households' discretionary spending power, as rising employment and lower fuel prices feed into incomes. That could provide some respite for Sainsbury and its peers if people choose to spend the extra money in the aisles.

There are a lot of moving parts here. The core supermarkets are going to continue losing sales to Convenience and online, because of changing shopper behaviour, before we even consider what the competition might get up to. The Bank is a source of upside, but only once the costs of setting it up properly are back under control.

Free cash flow should improve from here, due to the lower capex plans. A lower dividend bill helps too. Analysts are expecting Sainsbury to generate EBITDA of about £1,230m per annum for the next few years. Take off £200m or so for the dividend, about the same again for tax and £450m for capex and there is still quite a lot of cash left over, so debts ought to fall quite quickly.

If trading continues on its new, positive trajectory, then eventually, that cash might head toward shareholders. In the meantime, sticking to the dividend cover target of 2.0x suggests that the stock might yield around 4%, given that analysts were pencilling in earnings per share of 20-24p for the current year.

Highlights:

  • Sales declined 2% to £13.6bn (2014/15: £13.9bn) with Like-for-like (LFL) sales down 1.6%.
  • Underlying profit before tax declined 18% to £308m (2014/15: £375m).
  • Underlying basic earnings per share declined 17% to 12.0p (2014/15: 14.5%).
  • Underlying Return on Capital Employed declined from 10.3% to 8.5%.
  • Interim dividends fall 20% to 4.0p, representing 30% of last year's full year dividend. Group policy is that the full year dividend should be twice covered.
  • Fewer promotions and lower regular prices are contributing to better availability and more consistent quality.
  • Taste the Difference sales outperformed the overall basket, rising by 2% in volume, versus a 1% decline in overall food sales.
  • Online sales rose by 7%, Convenience Store sales rose by 11% and Supermarket sales declined by just over 2%.
  • Sainsbury's Bank income rose 6%, but the cost of transitioning it to full independence from its former banking partner is now expected to be at the top end of the £340-380m range.
  • The group is on track to lower costs by circa £225m this financial year and by £500m over the next three financial years.


CEO Mike Coupe expressed confidence in the company's progress and the strength of the Sainsbury's team, despite continuing challenging market conditions. Sainsbury's looks forward to a successful Christmas trading period.

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