Profits down as challenges persist
Sainsbury's interim results show a continuation of previous trends. Online and convenience trends remain positive, but supermarket sales continue to slide. Like-for-like retail sales are negative for the half.
Following the completion of the £1.4bn acquisition of Home Retail, the big issue for Sainsbury is the integration of Argos. With over £4bn of sales in 2015, Argos offers Sainsbury the chance to increase its exposure to the non-food market. Investors will hope that setting up Argos concessions within larger stores will simultaneously drive footfall and solve the problem of excess sales space.
Sainsbury is seeking to achieve around £75m of synergies from these space-saving concessions, as part of total savings of £160m p.a. Integrating Argos' delivery network could also benefit Sainsbury's online offering. Sainsbury's Bank can refinance Argos' loan book to release around £800m, so the cash cost of the takeover is minimal.
On paper then, the deal looks reasonable. However, both businesses also have longer-standing problems to deal with. Home Retail has struggled to compete with the likes of Amazon, while Sainsbury, like all of the large UK supermarkets, has come under pressure from price deflation. The rise of Lidl and Aldi means that its superstores in particular are struggling, despite improving general merchandise sales.
Sainsbury's CEO Mike Coupe can clearly see the challenges presented by the deal, and has described it as a career defining moment. It remains to be seen whether his multi-product, multi-channel strategy will turn two negatives into a positive. If it does, it will be a masterstroke.
In the meantime, the shares offer a prospective yield of over 4% and are on a PE of c. 11.7x.
Half year trading in detail:
Underlying retail operating profit fell by 7.2% to £308m, while profit at Sainsbury's Bank fell by 14.7% to £29m.
Group underlying sales increased by 2.1% to £13.9bn. This was driven by a +2.5% contribution from Argos and a +0.9% contribution from the net addition of 10 new convenience stores and a one supermarket. Sainsbury's like for like (LFL) sales dropped by 1%.
In retail, market share nudged down slightly, but volumes increased across all channels as Sainsbury's focuses on lower everyday prices. Food price deflation continues to impact operating margins, which fell to 2.47% in the half.
The Argos integration is on track, and the group plans to add 250 Argos digital stores to its supermarkets over the next three years. The group remain confident of achieving the £160m of annual synergies within the next 3 years.
The interim dividend is 3.6 pence per share (2015/16: 4.0 pence).
Looking forwards, the group says that the market remains competitive and pricing pressures continue to impact margins. Second half profits are expected to be lower than the first, with Argos contributing £55m-£75m. Sainsbury's expects to deliver 5 new supermarkets and around 40 new convenience stores in 2016/17.
Unless otherwise stated, all estimated figures, including prospective dividend yields, are taken from a consensus of analyst forecasts compiled by Thomson Reuters. These estimates should not be taken as a reliable indicator of future performance.
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