Sainsbury's shares: What matters in its latest results

With little to ignite fresh interest in the shares, our head of markets looks to the future.

These largely uninspiring half-year results will likely raise further questions on Sainsbury's (LSE:SBRY) strategy following the failure of the Asda merger earlier this year.

Much store had been placed on that tie-up, which would have made the combined entity a force to be reckoned with, given the clear synergies and complementary offerings which would have followed. However, the result is that Sainsbury's now has to decide how to differentiate itself in a notoriously competitive sector.

At the moment, the company is clearly using price as a weapon, while also committing to cost savings of £500 million, as previously announced. At the same time, it is looking to reduce net debt further and indeed has reduced the figure by 5% year-on-year, with an additional £300 million plus reduction pencilled in over the course of the year. 

Elsewhere, the Argos integration continues apace, as some stores are closed and simply moved into existing Sainsbury's sites, which will in turn free up more capital. Equally, the acquisition has been a shot in the arm for the overall Sainsbury's offering, even if the original announcement did raise a few eyebrows at the time. 

One thing that cannot be disputed is Sainsbury's ability to generate cash, which will continue to be crucial in its capital deployment plans. The company has also been able to raise a dividend which will remain adequately covered, and will add to the existing healthy yield of 5.3%.

Source: TradingView Past performance is not a guide to future performance

In the meantime, however, Sainsbury remains somewhat under the cosh. The phasing of cost savings, higher marketing expenses and even poor weather, let alone the one-off expenditure, has decimated pre-tax profit in this half, even though this should normalise for the remainder of the year. 

Like-for-like sales are down by around 1% overall, while the underlying earnings per share metric has fallen by 16%. There has been a notable dip in sales through the General Merchandise and Clothing divisions, although the latter showed something of a rebound in the latest quarter.

The update may not be disastrous, but it does little to fire up longer-term optimism. While the shares have enjoyed a 4% pop over the last three months, the price remains down 35% over the last year, which compares to a 4% gain for the wider FTSE 100 index. 

There is generally considered to be better value elsewhere within the sector, such that the market consensus of the shares as a 'hold' (albeit a strong one) is likely to remain in place.