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Sainsbury's - Full year results

Steve Clayton | 4 May 2016 | A A A
Sainsbury's - Full year results

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

Sell: 244.70 | Buy: 244.90 | Change 4.80 (2.00%)
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Sainsbury's results, for the year to Mar 12 reveal volumes and transaction numbers rising, offset by a tough food price deflationary backdrop. Online and Convenience sales continue to outperform the Supermarkets, and Sainsbury is making steady progress with its non-Food offer, particularly in clothing.

The shares opened around 2% weaker on the news.

Underlying profit before tax fell 14% to £587m (2015: £681m) with sales 0.4% higher at £25.8bn, a like for like fall of 0.9%. Underlying earnings per share and dividends are both reduced by 8.3% to 24.2p and 12.1p respectively (2015: EPS 26.4p, DPS 13.2p). Return on capital employed fell from 9.7% to 8.8%

Sainsbury believe that household income growth may now be slowing, but they also report that food price deflation is easing a little and they expect that food prices will return to growth eventually. In the near term, cost cutting is order of the day, with the group taking £225m off the cost base during the year and on course to achieve their £500m target.

Sainsbury's pricing strategy is based around reducing the basic prices of key categories, focusing on everyday lower prices and scrapping multi-buys. This also lowers the group's dependence on supplier rebates. Taste the Difference range continues to grow ahead of the broader range, up 2% over the year. 750 out of a planned 3,000 own label products have been improved.

£540m of capex was spent in the year, compared to £950m the year before. Sainsbury's opened just six new supermarkets and 69 convenience stores (2015: 8 & 98 respectively). The tough industry conditions meant that the value of Sainsbury's estate fell by £500m during the year, to £10.6bn.

Online sales rose by almost 9%, with orders up nearly 15%. Convenience sales were up over 9% and accounted for £2.3bn of sales. Non-food sales rose 3.5%, with clothing ahead by 8.5%. Sainsbury say that their Tu clothing brand is now the UK's sixth largest by volume and 10th largest by value.

Sainsbury's Bank increased profit by 5% to £65m, enjoying 5% income growth, in sharp contrast to the High Street banks. New mortgage launches are planned for 2017. The acquisition of Home Retail Group will enlarge the Bank's activities as it absorbs the Argos financial services client base.

Sainsbury make little mention of their plans and expectations for Argos. What they do say however, is that as consumer behaviours evolve, and especially as those consumers become more digitally engaged, having the flexibility of a multi-channel route to service demand, whether in-store, online for delivery, or click and collect, will become more and more essential to success.

The group did not provide an outlook statement or any guidance on expected levels of profitability.

Our view:

This year, it will be the interims to come, not the full year results just announced, that matter for Sainsbury's, when they will be revealing just what they think the acquisition of Argos will mean for the group. Right now, with the offer still open, Sainsbury are staying tight-lipped, leaving investors guessing. In the short term, it looks like the relief from a slower pace of food price deflation could be dulled by a reduction in consumer spending power gains, leaving the core supermarkets facing a further spell of tough trading.

Argos, with all of its own problems will be a challenge to integrate, but at least Mike Coupe has given the grocer an opportunity to move firmly into the multi-channel world and reduce its dependence on the vicious state of food retailing, where the Discounters show no sign of packing up and going home.

If Argos is smoothly integrated and its performance improved, then the deal will look a triumph, for the cash cost is minimal, once Sainsbury's uses the bank to refinance the Argos loan book. We have a lot of sympathy for their views on the rising importance of multi-channel customer relationships and fulfilment. What's less clear is whether Sainsbury's, or Argos can actually make decent money from any channels other than the old ones.

Spending on the core business has been slashed to levels unimaginable a few years ago and supermarket numbers are barely rising. On the one hand, that makes sense; returns are still falling, so why add to the problem? But if the estate is not growing and food deflation continues to negate the benefit of opex cuts, then profits only rise if Sainsbury's steers more shoppers through existing stores or sells more to the shoppers they already have.

That explains the motivation to do the Argos deal. With growth options in the core business so limited, the success or failure of "Argosbury's" is hugely important. Other plans to recycle excess space will have a role to play too, but nothing will move the dial as much as Argos. Here the outcome is still very uncertain, hence the importance of what the company has to say when it lifts its skirts a little in six months time.

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