With the sector about to be embroiled in a trade war of its own, Sainsbury (LON:SBRY) is preparing for the fight with some added momentum, which should provide some protection.
Given that in terms of market share, Sainsbury and Asda are more closely linked with numbers of 15% and 12.5% respectively, it is perhaps Sainsbury rather than Tesco (LON:TSCO) who could be under most pressure. However, these numbers are largely ahead of expectations, and Asda will have its work cut out if it is to upset the apple cart.
Sales of £31.56 billion were up by 3.1%, while underlying profit of £1.04 billion was 7.2% higher and marginally ahead of the expected £1.03 billion. Underlying profit was equally healthy, with the result of £761 million representing growth of 8.6% and comfortably ahead of the estimated £751 million.
With customers searching for perceived and actual value, the availability of the group’s Nectar scheme is also playing its part in increasing Sainsbury’s market share over the period and now extends to 9000 products. Indeed, the company estimates that within three years, Nectar will provide incremental profit of £100 million, which would be a significant bonus given the ferocity of competition which the sector attracts.
Promisingly, the target is already ahead of schedule, with £39 million achieved in year one.
The group’s prodigious cash flow has enabled another increase to the dividend, giving a projected yield of 7.1%, which is punchy by any standards. In addition, Sainsbury has announced a further £200 million share buyback programme, and has also earmarked £250 million for the payment of a special dividend during the year as a result of the sale of its banking operation.
Elsewhere, challenges remain. Quite apart from the impending cost pressures resulting from the Budget measures, which are expected to add £140 million of costs per annum, its non-food businesses are a mixed bag. There had been warning signs over the last few months that the consumer is becoming increasingly selective in non-essential items, which, coupled with other competitors specifically concentrated in this space, had somewhat left Sainsbury trailing.
While clothing sales grew by 2.9% over the period, General Merchandise fell by 2.8%, while Argos was unable to shake off a poor start to the year, resulting in a 2.7% fall in sales to £4.9 billion. There was a glimmer of hope as fourth quarter sales rose by 1.9% following some intervention on the online offering from the group, and it remains to be seen whether this momentum can be maintained.
More broadly, supermarkets may be about to embark on a price war, and Asda’s aggressive assault on prices, if it fully happens, will likely shave profits across the sector. The clouds had been gathering as Tesco downgraded its recent profit guidance ahead of a potential cost challenge to come.
Unlike Tesco, however, Sainsbury is guiding for the same level of underlying profit in the year to come, as well as an equally strong level of free cash flow in excess of £500 million. In addition, the group is well on track to achieve its target of £1 billion of cost savings by 2027, largely through investment in technology, which will continue to streamline its operations.
The share price has suffered along with the sector as a whole and has fallen by 10% so far this year, leading to a decline of 3.5% over the last year as compared to a gain of 5.5% for the wider FTSE 100. In addition, despite the progress, a relatively warm reception to the numbers and its undemanding valuation, Tesco remains the preferred play in the sector, with the market consensus for Sainsbury currently coming in at a hold, albeit a strong one.