Wednesday, 12 November 2014

Sainsbury - Interim Results

This time last year, Sainsbury was riding high - its share of the grocery market was the highest for a decade at 16.8%, following 35 consecutive quarters of like-for-like sales growth, online sales exceeded £1bn for the first time and the share price was 415p.

A year later sales growth is in decline and the shares have tumbled 37% - to be fair, as far as I can make out they have not done a lot wrong as all the major players appear to have been affected to some degree or other. At the time of publishing their final results in May, sales, profits and earnings were up so I have been awaiting these results in the hope that some light can be shed into the reasons for the slump.

They have today announced half-year results for the 6m to end September 2014 (link via Investegate).

Profit before tax is down less than forecast -6.3%% to £375m (2013/14: £400m) whist basic earnings per share is down 12% to 14.5p (2012/13: 16.6p) . These figures for underlying results excluded a £665m charge, mostly from a reassessment of its store pipeline and a write-down in the value of unprofitable and marginally profitable stores. Due to increased investment in lowering prices to the tune of £150m over the coming 12 months, combined with expected lower profits from its banking operation, Sainsbury warned that its full year profits would likely be lower than last year's.

Despite media speculation last weekend of a cut, the interim dividend has been maintained at 5.0p (2012/13: 5.0p). However, with the forecast of a reduction in H2 profits and a decision to target dividend cover at 2x, it is a probability the full year payout could be trimmed back. It is a little difficult to assess what the figure might be, but based on current analysts' estimates (which obviously may change) this would suggest a figure of around 9.0p which would make 14p for the full year, a reduction of around 17% on the 17.3p paid last year.

Management are implementing a new strategy to address some of the industry challenges.

  • A  reduction in capital expenditure from £925m (3% of sales) to between £500m and £550m p.a. over the next three years, approximately 2% of sales;
  • To deliver total operating cost savings of £500m over the same period;
  • Over the next 18 months, to improve the quality of 3,000 own-brand products, investing in range, innovation, packaging and merchandising, and deliver ethical sourcing in line with their values.
  • To reduce the number of large stores from around 40 to just 8
  • To better utilise underused space in around 25% of existing stores combined with a target of 100 smaller convenience store openings
  • To open 15 Netto stores by the end of 2015 in a joint venture with Dansk

New CEO, Mike Coupe commenting on the new strategy, said:
"Sainsbury's is a great business. Our consistent outperformance of our main supermarket peers over the past five years is evidence of this. We are facing into a once-in-a-generation combination of cyclical and structural change in the industry, but I firmly believe that this strategy, building on our unique heritage and track record of success and delivered by the most experienced management team in retail, will focus and energise our business to the benefit of customers, colleagues and shareholders alike."

The results received a mixed reaction and by the end of today the share price finished just 3p lower at 265p. If my guestimate of 14p dividend is correct, this gives a current yield of 5.3%.

Last month I topped up my holding at 260p - my breakeven figure is 300p so I’m hoping the recent turbulence is starting to settle down. Whether that was a good move or not only time will tell.

More on this following the Christmas trading update.

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