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Argos fuels Sainsbury's, but profits still fall

Sales at the supermarket chain has risen, but squeezed margins and high levels of exceptional costs have led to a third straight year of profit decline
May 3, 2017

For Britain's grocers, the conversation never veers far away from price. Sainsbury's (SBRY) chief executive, Mike Coupe, insists the business has done well to keep prices stable despite the wider inflationary backdrop, a result of the recent devaluation in sterling. Given this is an industry where price deflation has been the prevailing trend, Mr Coupe also pointed out that food remains substantially cheaper compared with recent history. Data from Kantar Worldpanel - released on the same day as these full-year results - show grocery sales are rising at the fastest rate since 2013, but stronger growth is currently coming from Sainsbury's rivals.

IC TIP: Hold at 273.5p

As a 'middle market' grocer, Sainsbury's treads a fine line between quality and value. But it's also created its own challenges, including absorbing Argos into its business as a result of last year's Home Retail acquisition. Looking at the total sales growth, it's clear Sainsbury's has a lot to thank Argos for. Over the course of the last financial year, retail sales (including VAT, excluding fuel) grew by 14.1 per cent, driven by a 14.5 per cent contribution from Argos, and a 0.2 per cent rise in new Sainsbury's space. On a like-for-like basis, Sainsbury's sales fell 0.6 per cent, compared with a 4.1 per cent rise at Argos in the second half.

While the top line looks good, profitability took a nose dive for a third year, this time due to a £78m exceptional charge, which was made up of acquisition and restructuring costs as well as various property-related expenses. But on an underlying basis, profitability only nudged down 1 per cent - which was better than the analyst consensus expectation. The group managed to claw back £130m in cost savings, while Argos also contributed £77m to retail underlying operating profit.

As we went to press, analysts at Shore Capital expect to downgrade their current forecasts. They had previously expected adjusted pre-tax profit of £706m for the year ending March 2018, giving EPS of 23.2p, compared with £581m in FY2017.

J SAINSBURY (SBRY)
ORD PRICE:273.5pMARKET VALUE:£5.99bn
TOUCH:273.4-273.6p12-MONTH HIGH:291pLOW: 212p
DIVIDEND YIELD:3.7%PE RATIO:16
NET ASSET VALUE:291pNET DEBT:21%

Year to 11 MarTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201323.377232.016.7
201423.989837.717.3
201523.8-72.0-8.713.2
201623.554823.912.1
201726.250317.510.2
% change+12-8-27-16

Ex-div: 11 May

Payment: 7 Jul