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Sainsbury's - Like-for-like sales slow

George Salmon | 9 November 2017 | A A A
Sainsbury's -  Like-for-like sales slow

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

Sell: 220.30 | Buy: 220.40 | Change -1.10 (-0.50%)
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Sainsbury's half year results show revenues rising 17%, boosted by the Argos acquisition.

Like-for-like (LFL) sales growth remains positive, at 1.6% over the half, but slowed to 0.6% in the second quarter. The shares fell 2.4%.

The dividend falls 14% to 3.1p per share as a result of the policy of paying out 30% of the previous full year payment at the interim stage.

Our view

When the Argos deal was announced, both businesses were struggling. We said that if CEO Mike Coupe could turn these two negatives into a positive, it would be a masterstroke.

The early signs suggest some progress is being made, especially at Argos, but there remains work to be done. All the more so given Grocery remains very much the senior partner.

Despite Online and Convenience continuing to impress, continued weakness in Sainsbury's superstores means the outlook here isn't too bright. The store-within-a-store format eats up some excess sales space in the struggling stores, and a total of 250 Argos Digital stores are set to pop up in the group's bigger superstores within the next two years. This could boost footfall, but in reality we feel it's unlikely to have a transformative impact.

The deflationary pressures that have dogged the industry are easing. But this isn't because competitive pressures are going away, rather that sterling's weakness is raising the cost of imported goods and prices are starting to rise on the shelves.

Discounters Aldi and Lidl continue to march on, and with traditional UK rivals unlikely to take a backwards step on pricing it's hard to see how profitability can be improved by engaging in a straight up slugging match. Sainsbury is instead seeking to differentiate itself by moving to serve customers wherever and whenever they like, through non-traditional services like Click & Collect.

All in all, it's commendable that Mike Coupe has got the boat facing in the right direction. However, given the strength of the current still flowing against it, one gets the feeling he'll need to row pretty hard to make decent progress.

At present the shares offer a prospective yield of 4.2%, and trade at 11.5 times expected earnings.

Half year results

Sainsbury's focus on lower prices helped customer numbers rise to a record 1.85m in the period. However this investment in pricing, plus wage cost inflation, saw underlying pre-tax profit fall 9% to £251m. As a result of the extra shares issued as part of the Home Retail deal, earnings per share fell 22%.

Grocery and Clothing grew LFL sales by 2.3% and 6.8% respectively. General Merchandise, which now includes Argos, dipped 0.1%. LFL performance in all three divisions tailed off over the half. Income from Sainsbury's Bank rose 56% to £225m, as it integrated the Argos loan book.

The integration of Argos is continuing pace. At present, the group has 112 Argos stores open in Sainsbury's supermarkets, with a further 53 to open by Christmas. The £160 million EBITDA synergy target looks set to be achieved six months ahead of schedule. Sainsbury's also expects to exceed its 2017/18 cost savings target of £500m by about £40m.

Free cash flow of £494m, up from £420m last year, helped net debt fall to £1.4bn.

Looking ahead, the group says conditions remain challenging, but Sainsbury remains confident of delivering around £572m in pre-tax profits this year.

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.

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