Sainsbury’s beat City forecasts when it reported its annual underlying pre-tax profits today (9 May) and, as such, the Square Mile welcomed the UK retailer’s results. The company has won plaudits for its performance in a tough sector but there are some questions around its future margins as it competes with the likes of Tesco.
Shore Capital analyst Darren Shirley
“In far from ideal economic circumstances Sainsbury continues to drive out a robust performance, characterised by like-for-like sales amongst the best of the Big Four British players. Whilst LFL sales have been robust it is inflation that continues to be the driving force of same store sales across the sector. Inflation may yet ease off in H2 of 2012, after a stronger than anticipated first four or five months of the year, which means Sainsbury will be hoping for rising volumes to compensate. That said, the company has challenging relative comparatives for the new financial year.
“Against fulsome industry comparatives, with a market leader that is clearly committing more operating resource to the cause, Sainsbury may find it more challenging or at least more costly, to sustain its recent relative outperformance. In this respect we note that underlying operating margins, that is excluding the dilutive impact of fuel, increased by 10 basis points in 2011/12 at Sainsbury, towards the lower end of the company’s aspired margin growth plans.
“However, headline operating margins rose by only four basis points to 3.54%, which makes Sainsbury’s return on sales still demonstrably weaker than Tesco and Morrisons. That said, CEO Mr. King & Co., have surprised us with the effectiveness of their marketing initiatives, including Brand Match, and we do not dismiss outright Sainsbury’s capability to proceed further. We do, however, believe that it may be more difficult for progress to be made.“
Oriel Securities analyst Jonathan Pritchard
“GBP712m defeated profit before tax forecasts. Consensus had gathered at GBP707m so this was a beat. We knew that sales growth had been strong, so the explanation was a slightly better conversion of cost savings into profit, such that operating margins were up by an underlying ten basis points. In the conditions, that’s a good effort.
“It is without doubt that conditions are very tough in the UK food retail market but Sainsbury is winning share and will continue to show core EBIT growth this year, unlike its quoted peers. Some sector trends are helping … but the fact that Sainsbury’s is a popular choice for treats, and that its value for money credentials are currently in the ascendant, are a testament to management’s clever reading of the market. This latter point is worth dwelling on. Brand Match has, management believes, done more for price perception in six months than could have been expected in three to four years. Customers are demanding both elements (ie price, quality) of the value-for-money equation. That makes growing margins tough, and we expect that Sainsbury’s delivery of its forecast flat margins in 2012/13 will be the best performance in the sector.
“The best food retailer but only a hold [rating on its shares]: it’s hard to get carried away by a stock that won’t see upgrades and is unlikely to rerate, and as such we feel a bit sorry for Sainsbury’s management, which is doing all it can for holders. The shares are without doubt our preferred option in the food retail sector. But times are tough and forecast momentum in the industry is definitely negative.“
Charles Stanley analyst Sam Hart
“Sainsbury’s reported another good set of full year results, which were slightly ahead of market expectations. The creditable outcome in a tough consumer and competitive environment reflected a combination of moderate underlying sales growth, the addition of new space and improved operational efficiency.
“Total sales excluding fuel were up by 4.5%, comprising like-for-like sales growth of 2.1% and a 2.4% contribution from new space. We highlight, however, that the like-for-like sales figure included a circa 1.1% benefit from store extensions and a further unquantified boost from food price inflation. Underlying sales volumes are estimated to have been down by a low single digit percentage.
“Trading conditions in UK food retail are expected to remain tough in 2012/13, with the consumer still under pressure and the competitive environment intense. Tesco’s decision to invest circa GBP1bn into its underperforming UK business creates additional uncertainty. Ultimately, however, we expect consumer demand to be relatively resilient and forecast Sainsbury’s to deliver another year of growth in earnings and the dividend in 2012/13.”