Sainsbury's expects operating profit growth as volumes rise

J Sainsbury (SBRY) expects retail underlying operating profit to rise by 5-10 per cent to over £1bn in its new financial year as its grocery volumes benefit from easing food price inflation, but another flat annual dividend highlights that this was a mixed set of results for the UK's second-biggest supermarket. 

The 15 per cent drop in statutory pre-tax profit was down to the ongoing restructuring of the financial services unit, which added £273mn of costs. Sainsbury's announced in January a "phased withdrawal" from its core banking arm, with future financial services products to be offered through a "distributed model" in the same way as it provides insurance. 

An underlying profit before tax of £701mn may have come in at the top end of the company's guidance range, but growth of 1.6 per cent was relatively muted. 

Grocery revenue climbed 9.4 per cent on the back of "volume increases across all major categories", which will be pleasing to hear for investors as the listed supermarket turf wars with discounters Aldi and Lidl continue. The company's Nectar Prices scheme is helping with competitiveness, while sales growth of 12 per cent for its premium Taste the Difference range suggests that some consumers are trading up in a context where UK food price inflation has slowed to its lowest rate since early 2022. 

House broker Shore Capital thinks there will be "easing volume momentum from here on as comparatives bite, noting that we also expect proprietary brand owners will be seeking to more assertively regain lost ground since 2022 to private label". 

General merchandise revenue was flat as Argos put in an uninspiring performance, hit by store closures in the Republic of Ireland. Argos store numbers fell from 709 to 659 over the year, with plans to close more sites while increasing the number of product collection points. 

Clothing revenue fell by 6.4 per cent, with lower volumes pinned on unfavourable weather. There were some unimpressive range performances and availability headwinds for the Tu clothing brand.

Sainsbury's set out a strategy update in February. It aims to save £1bn of operating costs over the three years to 2027, continue to grow grocery volumes ahead of the market, and improve its return on capital employed. 

We think a valuation of 12 times forward consensus earnings is fair given trading and prospects. Retail free cash flow is guided to be at least £500mn this year, compared with the £639mn posted in 2024. Hold. 

Last IC view: Hold, 272p, 03 Nov 2023