Sainsbury’s defaults to cost-cutting after Asda deal collapses

The Competition and Markets Authority’s (CMA) initial findings had cast serious doubt on the prospect of a merger. The regulator was seen as 'soft touch' by some after it gave its blessing to the Tesco (TSCO)/Booker tie-up in 2017, so it was always likely that the CMA’s new chairman, Andrew Tyrie, would take a harder line, particularly as it would have resulted in Sainsbury and Tesco holding nearly 60 per cent market share in the UK.

So what happens now? Instead of a comprehensive overhaul of its 2014 strategy, the group has refreshed it. Management added commitments to deleveraging, and investment in both the store portfolio and digital capabilities, to the obligatory noises on customer service, quality and value – hardly a novel approach. 

It has introduced a commitment to reduce net debt by “at least” £600m in the next three years, after blowing past its £100m target by bringing down the net figure by £222m since the end of FY2018. The group generated £220m of cost savings in the year and further savings are being targeted through improved “digital and delivery infrastructures”. However, a 30 basis point reduction in the full-year gross margin was undermined by a disproportionate increase in administration expenses – apparently there's still plenty of fat on the bone.  

Sainsbury's won’t see the £46m it spent on the doomed Asda deal, but luckily its last acquisition is having more success. The integration of Argos delivered its targeted £160m in cash profit synergies nine months ahead of schedule. The group has been closing Argos stores at a rapid clip, opting instead to open them within existing Sainsbury's locations and reduce overall rental rates. The number of standalone Argos stores dropped by 221 in the year, but in-store branches meant the total number rose by 47 to 883. The group also added 314 new collection points, bringing the total to 317.

Bloomberg consensus forecasts predict adjusted earnings per share of 20.9p for the year to March 2020. However, it is worth noting that the group has outperformed consensus figures for the past two years, generating 22p in the latest period against expectations of 20.4p.