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Sainsbury - Better Q2 and basket of cost savings

Nicholas Hyett | 25 September 2019 | A A A
Sainsbury - Better Q2 and basket of cost savings

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

Sell: 190.65 | Buy: 190.80 | Change 3.60 (1.92%)
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Like-for-like sales (excluding fuel) fell 0.2% in the second quarter. However, that's an improvement on recent times, with total sales actually ticking up 0.1% thanks to a strong result in clothing and groceries.

Full year profits are on course to meet market expectations, with half year results to be announced on 7 November.

The shares rose 2.2% in early trading.

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Our view

Things have been difficult for a while at Sainsbury. Sales have failed to inspire, and we think it's hard to see that changing soon.

The grocery sector has always been competitive, but it's now more crowded than ever. Aldi and Lidl offer cheaper alternatives, then there are more upmarket offerings like Waitrose, M&S Food and Ocado. And with the latter two teaming up to boost M&S' online footprint, competition is at fever pitch.

That competition means Sainsbury's sales have been falling, despite a big investment in discounting prices - and while cost savings are helping to a degree, margins remain around a lowly 2.5%. More recently sales have stabilised, with new offerings like increased vegetarian products proving popular, but as the saying goes 'one swallow doesn't make a summer'. We remain cautious until we see evidence of a sustained recovery.

Sainsbury was hoping a merger with Asda would bring a solution. But since that's a non-starter, the group is still searching for a catalyst for change. Cost savings are taking centre stage with synergies expected to ramp up and a restructure of the store estate expected save money too. Boosting margins would help profits even if sales growth remains in the doldrums.

The prospective yield is now 5%, but it's worth remembering the dividend is linked to earnings. Sainsbury will need to increase profitability if the payout is to materially rise in the future.

All-in-all, "tough conditions" remains the phrase du jour. Sainsbury is doing what it can to boost performance, but there's still plenty of work to do.

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Second Quarter Trading Update

Grocery sales rose 0.6% in the second quarter, better than the market, with clothing sales up 3.3%. That was offset by weaker General Merchandise sales, down 2%, as lower promotional activity and a lack of new product releases in gaming and toys impacted results.

The group also announced further cost savings plans at Capital Market day taking place alongside results. Costs are expected to fall by £500m over the next five years, with the store estate undergoing a major reshuffle. The group also plans to stop mortgage lending with immediate effect as it looks to double underlying profits before tax from Sainsbury's Bank.

The group plans to reduce net debt by at least £750m over the next three years (up from a previous target of £600m) and has taken steps to reduce cash contributions to the pension through a new asset backed pension plan.

Although higher marketing costs, poor weather and timing of cost savings are expected to negatively impact first half profits, the group remains upbeat about the full year.

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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 disclosure for more information.