Must read: AB Foods, Sainsbury's

Associated British Foods half year – Tuesday 21 April 

January’s profit warning got Associated British Foods (LSE:ABF) off to a shaky start for the year, as the company warned of weaker than expected European Primark sales and pressure on US cooking oils and baking ingredient revenues. The subsequent dip in the price leaves the shares trailing by 13% in the year to date, and by 22% over the last two years.

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Strategically, this is a busy time for the business and investors will be keen to hear any updates on the fate of its Primark arm, which accounts for half of overall group revenues. The group considers that the market does not fully appreciate its other units, despite its portfolio, expertise and potential. As such, it feels that the sugar, grocery, ingredients and agriculture businesses would be better served by hiving off the Primark business so that investors can fully focus on the exposure to foods which gives the group its name.

At the same time, the rationale extends to considering whether Primark is reaching a size where it perhaps requires laser focus to capitalise on its own growth prospects, particularly overseas where the brand is gaining some real traction.

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The consideration for the split is understandable, with Primark being a jewel in the crown for the group, although this has been a challenging time for the retail business with mixed numbers. Quite aside from the challenging backdrop of a cautious consumer, the sector itself is famously competitive, and Primark now lines up against the likes of Chinese players such as Shein and Temu, while its online offering is still far behind that of Next. 

On the shareholder return front, a further £250 million buyback is ongoing and the dividend was previously maintained, giving a yield of 3.4%. 

However, the outlook is certainly muddied by the distraction of the strategic review, with the group already fighting fires on several fronts. As such, investors will be hoping that the bottom has been reached for the company and that, should it proceed, the split of the group results in the release of some pent-up value on both sides.

Sainsbury’s full year – Thursday 23 April

Sainsbury (J) (LSE:SBRY) spent considerable time and thought planning for its important Christmas period and its efforts were largely rewarded with a strong showing, even though its General Merchandise and Argos units made for less pleasant reading.

Overall sales for Christmas rose by 3.3%, and for the third quarter by 3.9% to £10.03 billion. The performance was sufficient for the group to maintain its full-year guidance of retail underlying profit to exceed £1 billion, while increasing its estimate of cash flow from £500 million to more than £550 million. At the same time, its plan to achieve £1 billion in cost savings by 2027 is alive and well, while shareholder returns remain in focus.

Grocery remains central to the group’s efforts, accounting for 78% of overall sales. Revenues grew by 5.1% over Christmas and by 5.4% over the third quarter, with the likes of the group’s Aldi Price Match and Your Nectar Prices proving popular. Indeed, the company estimates that over a three-year period Nectar will provide incremental profit of £100 million. The group is already ahead of plan with the target, which would be a significant bonus given the ferocity of competition which the sector attracts.

Elsewhere, the news was less encouraging. General Merchandise and Clothing sales fell by 1% over Christmas and 1.1% over the quarter, held back slightly by the GM performance where reduced space allocation in stores and reduced consumer discretionary spending had an impact, although at 6% of group sales the effect was limited.

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Argos remains a work in progress after some years in the doldrums on reduced discretionary spend. Sales fell by 2.2% over Christmas and by 1% over the quarter, which is a further disappointment particularly given the Black Friday and festive opportunities. Sainsbury's attributed the weakness to a number of factors, including a tough promotional market resulting in lower prices, a weak gaming market and subdued consumer confidence. Accounting for 16% of group revenues, the unit remains something of a thorn in the side for the group as a whole and it will be interesting to see if this could result in a review of whether to retain the brand in its portfolio.

More positively, shareholder returns are a highlight, although arguably already baked into the price. The group expects to return £800 million to shareholders this year, including a special dividend of £250 million and a share buyback programme of the same size. This will lift the dividend yield to a punchy (if temporary) 7.1% including special payouts, with the 4% underlying yield also an attraction. In the meantime, a share price rise of 42% over the last year will have the effect of higher expectations of Sainsbury's running into the results.