Sainsbury has agreed to sell Argos for total cash proceeds of at least £120mn.
The transaction is expected to have no impact on underlying operating profit but should boost underlying earnings per share by a low single-digit percentage.
Full-year guidance remains unchanged, with the group expecting underlying operating profit of between £975-1,075mn and Retail free cash flow of more than £500mn.
The shares were up 1.7% in afternoon trading.
Our view
Sainsbury’s sale of Argos looks like a sensible step. Argos has struggled to grow consistently and made group profits less predictable, often distracting from the stronger performance of the food business. Letting it go should create a simpler company, free up management time and allow more investment to be directed towards grocery. The deal won’t transform profits overnight, but it should improve the quality of the investment case.
That food business continues to gain market share, helped by better products, competitive prices and more innovation. ALDI Price Match and Nectar Prices have been expanded across more products and are helping to keep customers loyal. Sainsbury’s has also attracted more shoppers doing a full weekly shop, an important sign that its offer is resonating beyond occasional top-up visits.
Sales growth and cost savings are helping offset higher national insurance and minimum wage bills. But Sainsbury’s is choosing not to pass every cost increase on to shoppers, because keeping prices competitive matters in a market where customers can switch easily. That is good for the long-term health of the brand, although it means profit margins are likely to remain under pressure in the near term.
Investment in stores adds to that pressure, but it should support future sales by improving availability, layouts and the overall shopping experience. Management has shown it can balance these investments with tight control of day-to-day costs. Full-year guidance still points to broadly flat profit, so investors shouldn’t expect rapid earnings growth, but the underlying grocery operation is moving in the right direction.
Sainsbury’s is also becoming less exposed to areas where demand can swing sharply when household budgets are squeezed. That should make future performance easier to understand and reduce some of the risk around forecasts. Grocery is still highly competitive, though, and rivals will keep investing in price, quality and convenience.
The balance sheet is in good shape and free cash flow remains strong. Selling Argos should reduce debt and support cash generation over time, even though the sale proceeds are expected to be absorbed by separation costs rather than fund an extra share buyback. There is still good support for the prospective 4.1% dividend yield, but no returns are guaranteed.
Overall, the sale sharpens the focus on what Sainsbury’s does best and removes a business that has been a source of uneven performance. We view that positively, but much of the progress in food is already reflected in a valuation above its long-term average. With competition intense and costs still rising, the current valuation looks about right to us.
Environmental, social and governance (ESG) risk
The retail industry is low/medium in terms of ESG risk but varies by subsector. Online retailers are the most exposed, as are companies based in the Asia-Pacific region. The growing demand for transparency and accountability means human rights and environmental risks within supply chains have become a key risk driver. The quality and safety of products as well as their impact on society and the environment are also important considerations.
According to Sustainalytics, Sainsbury’s management of ESG risks is strong.
An area of strength is the fact that the group’s executive pay is explicitly linked to ESG performance targets. However, within that, the group’s ESG disclosures aren’t in accordance with leading reporting standards, in particular the environmental policy is weak. This is significant given the group’s extensive packaging and freight usage. The group’s large scale puts it at increased risk of scrutiny when it comes to product reputation, and is something to monitor as customer appetites lean more towards sustainable options.
J Sainsbury key facts
All ratios are sourced from LSEG Datastream, based on previous day’s closing values. 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 LSEG. 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.