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Sainsbury - profit at top end of guidance

Retail sales, excluding fuel, rose 2% to 28.7bn pounds for the full year.

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Retail sales, excluding fuel, rose 2% to £28.7bn for the full year. That reflects a 10.8% increase in Grocery, which was driven by higher overall prices rather than volume. General Merchandise fell 4.9% - Argos declines were smaller than Sainbury's general merchandise, and clothing sales were flat.

Despite a dip in margins as the group invested in keeping prices down, as well as lower volumes, underlying pre-tax profit came in at the top end of the group's guidance range at £690m. This was a 5% fall on the previous year.

Retail free cash flow rose £142m to £645m, reflecting lower inventories and more favourable payment terms with suppliers following Covid disruption. Group net debt, including leases, was £5.2bn.

Looking ahead, Sainsbury currently expects underlying pre-tax profit of around £640m - £700m in the new financial year. It acknowledged the outlook for consumer spending is uncertain.

A final dividend of 9.2p was announced, taking the full-year payment to 13.1p per share, in-line with the previous year.

The shares fell 0.7% following the announcement.

View the latest Sainsbury share price and how to deal

Our view

As the cost-of-living crisis rumbles on, Sainsbury is throwing a lot at becoming better value.

While this strategy has paid off, offering value doesn't come cheap. Profits are falling because of this decision, as well as lower volumes as customers reduce the size of their shops in response to the difficult conditions. Those in the middle of the market, like Sainsbury's, are most exposed in these tough times. It means the group has no choice but to get its hands dirty and fight for customers with the likes of Tesco and, increasingly, Aldi. That puts a firm ceiling on margins, and it's unclear when things will normalise.

The cost saving programme is helping to combat rising costs and progress has been good. The 3-year, £1.3bn target by 2023/24 remains on track.

Sainsbury is especially exposed to General Merchandise, with its ownership of Argos. Demand at Argos is faring better than general merch in Sainsbury's stores, but it's still ultimately a picture of decline. This type of revenue is even more difficult to capture when the economy is sluggish - dinner needs putting on the table no matter what, but new mugs and tablemats can wait.

The balance sheet is also in better condition, with the group hitting its four-year £950m net debt reduction target a year ahead of schedule. Along with the £600m+ of retail free cash flow this year, there's some significant weight behind the healthy prospective yield. Remember, no dividend is guaranteed.

We continue to be pleased with the direction of travel at Sainsbury. Demand is holding up better than we feared. Grocery competition is fierce though, and the uncertain environment isn't currently reflected in the group's valuation in our view.

Sainsbury key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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.

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Written by
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 27th April 2023