Sainsbury (J) plc (SBRY) Ordinary 28,4/7p
HL comment (28 April 2022)
Full-year sales, excluding fuel, were down 2.6% to £28.1bn. Grocery sales were broadly flat and an increase in Clothing couldn't offset the fall in General merchandise as sales continued to normalise.
Benefiting from lower covid related costs, group underlying operating profit increased 46% to £1.0bn.
The group warned of "significant external pressures and uncertainties" putting pressure on full-year underlying profit which is expected between £630m-£690m.
The board proposed a final dividend of 9.9p.
The shares were down 2.6% following the announcement.
Profits may have jumped as Covid costs fall away, but a cash strapped consumer and return to more normal shopping patterns means the outlook's a little murky. Even more reason to be relieved the group's targeting a more specific market. It's sliding down the value chain and investing heavily in reducing prices, to take on the competition from the likes of Aldi and Lidl. Raising prices after the rest of the market means it's been able to keep that value proposition alive and offer its strongest value proposition in years.
But for all the positive momentum, Sainsbury's faces challenges.
General Merchandise sales remain subdued, and while current events including supply chain disruption are partly to blame, there are structural declines in some markets. Sainsbury's is especially exposed to this market thanks to the acquisition of Argos.
The pandemic resulted in an expedited reshuffling of the Argos store closure and integration programme. While that makes sense on paper, the costs involved are huge and general merchandise is more exposed to shifts in discretionary spending. For now, sales remain ahead of pre-pandemic levels but with a cost-of-living crisis underway those levels look under pressure.
Groceries remain Sainsbury's bread and butter, and there are potential pressure points for margins. The group has done well to massively increase online capacity, but this came with huge costs - granted cost control actions are starting to yield results. At the same time, the decision to focus on lowering prices means that if volumes don't keep pace, profits will suffer. That's not a problem at the moment, but something we're wary of in the medium-term.
Aldi and Lidl offer even 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. The sale of Asda and likely rejuvenation of the brand means we could be looking at another all-out price war. That makes the work Sainsbury's doing on its proposition very important.
We can't knock progress, especially because 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. That gives the group more breathing room while it attempts its restructure. It also adds some weight behind the not-insignificant prospective yield of 5.0%. Remember, yields are variable and not a reliable indicator of future income.
We continue to be pleased with the direction of travel at Sainsbury. Competition is fierce at the bottom end of the value chain though, and the lower-than-average valuation reflects the not insignificant challenges ahead.
Sainsbury key facts
- Price/Earnings ratio: 10.5
- 10 year average Price/Earnings ratio: 14.0
- Prospective dividend yield (next 12 months): 5.0%
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.
Full year results
Fuel sales increased by 60% to £4.8bn due to higher oil prices and increased traffic volumes. Supermarket sales fell 2.0% having risen 11.4% the previous year. Within which, online grocery sales fell 4.7% following just shy of a 120% increase the prior year. A recovery in footfall to urban areas meant Convenience store sales increased 8.8%.
Grocery sales fell 0.2% to £21.0bn, the groups value proposition performed well with campaigns such as 'Aldi Price Match' and raised prices behind the market on high volume products.
General Merchandise sales fell 11.9% to £6.1bn as the group lapped a prior year where sales were boosted by lockdown purchases. Supply chain challenges also weighed on the group's ability to service demand over the year.
Full priced sales and higher in-store sales helped Clothing sales rise 12.7% to £1.0bn, following a year of suppressed demand due to restrictions.
The total Sainsbury store estate shrunk to 1,407 stores from 1,411 stores since March 2021. During the period, 73 standalone Argos stores closed and 64 opened within Sainsbury stores. As at 5 March 2022, Argos had 728 stores including 400 stores in Sainsbury's. The standalone Argos store estate is expected to fall to around 100 by March 2024.
Financial Services posted an underlying operating profit of £38m, from a loss of £21m the year before. That comes as credit provisions were lowered and some covid related bad debt provisions were released. An increase in net interest margin from 3.5% to 4.5% also helped.
Retail free cash flow decreased by £281m to £503m, as some of the working capital benefits seen last year unwound. Net debt, including leases, increased from £6.5bn to £6.8bn due to the lower free cash flow. At the end of the period, the ratio of net debt to cash profit was 3.1 times.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. 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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