Sainsbury’s pandemic boost marred by restructuring

In a similar vein to rival supermarket chains Tesco (TSCO) and WM Morrison (MWR), J Sainsbury (SBRY) has also benefitted from surging sales during the Covid-19 pandemic. The six months to 19 September saw retail sales (excluding fuel) climb by 7 per cent year-on-year to £14.8bn, driven by higher demand for both grocery products and general merchandise. The overall topline was squeezed by an almost 50 per cent collapse in fuel sales amid price deflation and fewer vehicles on the road.

It has been well documented that the pandemic has driven consumers to buy their groceries online – according to data consultancy Kantar, one in five UK households now order their food over the internet. Sainsbury’s online grocery sales more than doubled in the first half of its financial year and they now account for 17 per cent of total grocery sales versus 7 per cent in March. Weekly online orders have exceeded 700,000 and the group is expanding capacity so that it can fulfil 760,000 orders per week by the end of the year.

It’s not just groceries benefitting from the online shopping boom. Thanks to higher demand for office equipment, gaming products and seasonal items, revenue from Argos jumped by 11 per cent year-on-year, with 90 per cent of sales originating online.

Sainsbury’s did incur £290m of Covid-19-related costs, although this was offset by business rates relief and efficiency savings in areas such as logistics. Underlying operating profit therefore increased by 9 per cent to £500m – some 17 per cent ahead of analysts’ expectations. This is despite a £55m operating loss in the financial services business on the back of reduced demand for consumer credit, lower fee income from ATMs and provisions for bad debt.

On a statutory basis, the group swung to a £137m pre-tax loss, weighed down by £480m of restructuring and impairment charges. This comes as the process to integrate Sainsbury’s and Argos has been accelerated and it aims to close 420 Argos stores by March 2024. The group is guiding to £625m of non-underlying costs this year as it reorganises its business.

Net debt ticked down by almost a tenth from the March year-end position to £6.2bn, equivalent to 2.7 times adjusted retail cash profits (Ebitda). Meanwhile free cash flow from the retail business rose by over a third to £943m. While Sainsbury’s deferred declaring a final dividend back in April, it will now hand shareholders a 7.3p special dividend alongside its interim payout.

Amid a stronger than expected sales performance, the group has upgraded its guidance. Having previously anticipated that full year underlying pre-tax profit would be roughly level with the £586m seen in the year to 7 March 2020, it now expects at least a 5 per cent increase. Analysts are pencilling in £600m of underlying pre-tax profit in 2021, rising to £611m in 2022.

A second national lockdown means that Sainsbury’s pandemic tailwind will likely continue and there is also the bumper Christmas period to look forward too. But there are challenges ahead – price competition in groceries is ramping up, the exposure to discretionary retail could prove detrimental during a recession and a downturn could also complicate any turnaround in the banking business. Sell.

Last IC View: Sell, 213p, 01 Jul 2020