Sainsbury reported full-year retail sales of £31.6bn, up 3.1%. Growth was driven by a 4.6% uplift in grocery sales as volumes grew ahead of the broader market. This more than offset a 2.7% decline at Argos.
Retail underlying operating profit rose 7.2% to £1.0bn, fuelled by top line growth and the ongoing cost-cutting programme.
Free cash flow fell by £0.1bn to £0.5bn due to higher levels of investment and unfavourable timing of supplier and customer payments. Net debt rose by £0.2bn to £5.8bn at year-end.
Full-year guidance points to retail underlying operating profits of around £1bn (£1.1bn expected), and retail free cash flow of more than £0.5bn.
A final dividend of 9.7p per share has been announced, taking the full-year total to 13.6p, up 3.8%. A new share buyback programme and special dividend have been announced, expected to total at least £450mn.
The shares rose 3.6% in early trading.
Our view
Sainsbury delivered a good set of full-year results with revenue and profits both climbing higher. Guidance for the year ahead was a touch soft. But a new share buyback programme and special dividend appear to have been enough to offset this, and the shares reacted positively on the day.
Back to the main story, Sainsbury continues to scoop up market share, in large part due to a herculean effort to improve products, value perception and innovation more generally. Things like the ALDI price match and Nectar prices are helping on this front too. They’ve been expanded across more products than ever before and are doing a great job at keeping customers loyal.
With operations focussed on this side of the Atlantic, President Trump’s tariffs pose little threat to disrupt operations directly. But keep in mind that Sainsbury’s is more exposed to general merchandise than its peers through its ownership of Argos, an area where sales have been weak. If US-led tariffs cause a global economic slowdown, this area is likely to come under more pressure.
The top-line growth and efficiency improvements have been enough to keep profits moving in the right direction so far. But guidance for the current year points to profits remaining broadly flat as changes to employers' National Insurance contributions and the national minimum wage look set to bring at least £140mn of additional costs.
To help offset this impact, it’s very likely that prices at the till will have to go up. While Sainsbury’s peers are all in the same boat, it does mean competition on prices will rise. The cautious guidance gives Sainsbury’s plenty of wiggle room to get its hands dirty here. We’re cautiously optimistic that an all-out price war won’t materialise, potentially leaving room for positive surprises as the year progresses.
The balance sheet remains in good shape, with the ratio of net debt to cash profit (EBITDA) sitting towards the lower end of its target range. And with strong cash flows, there’s plenty of weight behind the group’s prospective 5.8% dividend yield. Shareholder returns should also receive a boost of at least £250mn this year, when the sale of its core Sainsbury’s Bank assets to NatWest completes. But remember, no shareholder returns are guaranteed.
Overall, Sainsbury’s has done just about all it can to better itself, and it should be commended for that. While it’s not our preferred name in the space, the valuation is undemanding and the income opportunity looks appealing. Nonetheless, tough competition means further volatility can’t be ruled out.
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
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