ii view: Sainsbury's profits impress but shares hit new low

A food first approach is being pursued and the shares offer an attractive dividend yield. Buy, sell, or hold? 

Full-year results to 5 March

• Revenue includes fuel and excludes VAT up 2.9%
• Adjusted pre-tax profit up 104% to £730 million
• Final dividend of 9.9p per share
• Total dividend for the year up 24% to 13.1p per share
• Ratio of net debt to adjusted earnings down to 3.1 times from 3.4 times

Guidance:

• Expects to report full year adjusted pre-tax profit of between £630 million to £690 million

Chief executive Simon Roberts said

“In a year of unprecedented change we have been relentlessly focused on putting customers and colleagues first while delivering the first year of our plan to put food back at the heart of Sainsbury’s. We said we would invest in value, innovation and service and that’s exactly what we’re doing.”

ii round-up:

Supermarket operator Sainsbury (J) (LSE:SBRY) today reported full-year profit to early March marginally above its prior forecast but warned of significant external pressures and uncertainties in the year ahead. 

Adjusted profit of £730 million exceeded management’s previous estimate of around £720 million, although its initial profit estimate for the year ahead of between £630 million to £690 million is at the lower end of City forecasts. 

Sainsbury's shares fell by more than 2% in UK trading to leave them down around 15% year-to-date at prices not seen since March 2021. Shares for rival Tesco (LSE:TSCO) are down around 5% so far in 2022, while the FTSE All-Share index is down around 1%.

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A war in Ukraine has added to cost pressures from supply chain challenges in the wake of the pandemic, elevating inflation and raising concerns for consumer spending. 

Retail sales including fuel rose 3.4% from a year ago, with digital related sales up to 39% of the total from 23% two years ago. Grocery sales over the year proved flat, while general merchandise sales fell by 11.9% and clothing sales climbed 12.7%.

The group’s financial services business returned to profit, generating £38 million, with management expecting a further improvement over the current financial year.

The FTSE 100 listed retailer also made an initial commitment to increase its dividend payout ratio to around 60% from a previous 53%. 

ii view:

Founded in 1869, Sainsbury’s today has a stock market value of around £5.4 billion. The market it operates in is tough and highly competitive. Discount retailers Aldi and Lidl continue to battle for increased market share. Tesco is working hard on its reset strategy, while new owners at Morrisons and ASDA will not be standing still. At the upper end, Marks & Spencer (LSE:MKS) is also now partnered up with Ocado Group (LSE:OCDO) in offering its food online.

For investors, the fall in general merchandise sales is hard to ignore. Consumers are now pressured by elevated inflation and a broader cost-of-living crisis, whilst supply chain challenges persist, and competition remains highly intense. 

More favourably, costs continue to be attacked and the balance sheet strengthened. The performance of its banking business is now moving in the right direction, while robust free cash flows underwrite increased shareholder returns. For now, while challenges persist, a defensive offering and a dividend yield in the region of 5% are likely to offer appeal to income-seeking investors with a longer term outlook. 

Positives: 

• A cost saving programme ongoing
• Attractive dividend payment (not guaranteed)

Negatives:

• General merchandise sales down 11.9 year-over-year
• Intense sector competition

The average rating of stock market analysts:

Hold