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Sainsbury - profits down but in line with guidance

Nicholas Hyett | 7 November 2019 | A A A
Sainsbury - profits down but in line with guidance

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

Sell: 209.30 | Buy: 209.50 | Change 2.90 (1.40%)
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Underlying revenues were broadly flat at £16.9bn, despite like-for-like (LFL) sales excluding fuel dipping 1%. The timing of cost savings, higher marketing costs and a tough comparison with last year meant underlying pre-tax profit fell 15% at £238m. This was in line with previous guidance.

An interim dividend rose 6% to 3.3p.

The shares were little moved following the announcement.

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Our view

Things have been difficult for a while at Sainsbury and sales have consistently failed to inspire.

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.

Sainsbury's sales have been falling, despite a big investment in discounting prices, and while cost savings are helping to a degree, margins have slipped to under 3%. 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 also think the group lacks a clear plan on how sales are going to be boosted longer-term. That's an issue because although the group's pulling off some impressive cost savings - Argos integration is expected to bring in £500m worth of synergies over five years - at some point the cost-saving towel will be wrung dry. If margins and profits are going to keep a spring in their step, it's sales that will have to plug the gap.

In the meantime, the prospective yield is 5.2%. That's higher than the market average and covered 2.4 times by underlying earnings. That should mean investors are reasonably well rewarded for keeping the faith. But if sales continue to stagnate dividend growth could be a stretch, and no dividend is guaranteed.

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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Half year results

Grocery sales fell 0.1% in the half to £10.3bn. That reflects a tough comparison with last year, particularly in the first quarter, when warm weather boosted 2018 sales. A weaker supermarket performance offset more positive trends in online groceries and convenience store sales, which rose 7% and 2% respectively.

Clothing sales dipped 1.2% to £488m, while General Merchandise was down 2.5% at £3bn. As a result, total Retail sales excluding fuel declined 0.6%, to £13.9bn.

Higher costs meant underlying operating margins shrank to 3% (2018: 3.3%), and underlying operating profits fell 10.3% to £437m.

During the first half, Sainsbury closed one supermarket, increased its convenience store estate by 4, and closed a net total of 6 Argos stores.

Sainsbury's Bank net income was flat year-on-year at £227m, as increased lending was offset by the higher cost of funding. Operating profits from the bank increased 25% to £20m. The group stopped mortgage lending in September.

Retail free cash flow of £698m was up £81m, following the disposals of joint ventures with British Land. Net debt reduced by £568m to reach £6.8bn.

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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.

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