Profits and sales tumbled at Sainsbury’s in its first half, but the retailer reported an improved performance in the second quarter of the period as its investment in lower prices enticed customers.
Group sales in the 28 weeks to 21 September 2019 fell 0.2% to £16.9bn, with retail sales down 0.6% and like-for-like figures 1% lower. Underlying profits dipped by £41m as expected - or 15% - to £238m.
But what did City analysts make of the supermarket’s performance?
Richard Lim, CEO at Retail Economics, said: “The sharp fall in profits may well reflect the phasing of cost savings, but blaming the weather and higher marketing expenses suggests there is significant pressure on profit margins bubbling under the surface. There’s no getting away from the fact that sales fell across all parts of the business, reflecting tough market conditions.”
He added that the integration of Argos appeared to be progressing well.
“It offers a truly attractive proposition for customers who increasingly bounce across physical and digital channels, often at the same time. Despite the failed Asda takeover attempt, the store network still offers widespread UK coverage to support convenient online collections while continued investment in speedier deliveries puts them well ahead of most retailers.”
Helal Miah, investment research analyst at The Share Centre, said the key takeaway was that the pace of decline had slowed and it had fared better than some of its key rivals.
“What we may be seeing is better focus on improving the underlying performance and since its merger with Asda was blocked, it has increased promotional activity, including price cuts to win back shoppers,” Miah added.
“There is still a lot to do at Sainsbury’s. The recent strategic review suggests it will carry on introducing more technology at its food and Argos stores and focus on cost-cutting, exit some financial services and continue with the digital deployment of the Nectar rewards scheme. At the same time, the grocery market is only going to get more competitive as the German discounters target a bigger market share and the uncertain economic and political environment suggest still tough times for consumers and the retail environment as a whole.”
Thomas Brereton, retail analyst at GlobalData, said a deeper dive into the results showed why Sainsbury’s was now feeling optimistic that it could turn itself around following the disarray experienced after the collapse of its planned merger with Asda.
“Taking the results at a quarterly level, Q2 shows a good improvement on Q1. While this comparison is slightly distorted (with Sainsbury’s showing growth yet underperforming a weather-buoyed market in Q2 2018), it signals that Sainsbury’s is a retailer now finding its feet after underperforming for the previous 18 months.
“A lot of this improvement comes from putting right a lot of self-made issues during 2018 - such as availability. Sainsbury’s must now be beginning to feel it has a clear direction forward.”
Clive Black of Shore Capital was more cautious and said the outlook at the supermarket was constrained.
“Sainsbury writes of a highly competitive market and an uncertain consumer outlook,” Black added.
“The group does expect a profit bounce in H2, reflecting the annualisation of FY2019 wage awards and a normalisation of marketing costs, that is lower versus H1 when it arguably acquired sales, and normal weather comparatives.
“With such guidance, and the lower cover, Sainsbury stock is not a ‘buy’ to our minds. In fact, the bigger question is the robustness of H2 and so FY2020 forecasts, noting a flat medium-term guide from the group. As such, why bother? Harsh, but true.”
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