Join our community of smart investors

Sainsbury's retail free cash flow impresses

The chief executive emphasised the supermarket's focus on 'value' as grocery trading conditions continue to be challenging
April 28, 2023
  • Volumes down
  • Conservative profit guidance

J Sainsbury’s (SBRY) statutory profits plummeted as the grocer was hit by £281mn-worth of non-cash impairments due to higher interest rates and a £150mn fall from the previous year in net income from legal settlements. But an underlying profit of £690mn, while down 5 per cent against 2022, came in at the top end of management’s guidance range and was ahead of market expectations as the company continues to battle it out with elevated inflation. The impact of tough trading conditions was evident in the company’s forecast that underlying profits could very well fall again in 2024, with guidance set at between £640mn and £700mn, although this still looks solid given that is well ahead of the £586mn posted in 2020.  

'Value' is the word on everyone’s lips in the grocery sector as price pressures come into conflict with consumer budgets, with the top listed players looking nervously over their shoulders at discounters Aldi and Lidl. Sainsbury's chief executive Simon Roberts pointed to the more than £560mn the supermarket has invested over the last two years in keeping prices down and argued that “we are now the best value compared to our competitors that we have been in many years”. Accusations of so-called 'greedflation' don't look accurate in Sainsbury's case given that the retail margin fell by 41 basis points in the year.

The top-line performance was steady enough given material inflation but hardly thrilling and displayed the focus on value as the business faced lower volumes. Total retail sales (excluding fuel) rose by 2 per cent, with a 3 per cent uplift for grocery sales helped by improved market share penetration. But general merchandise sales fell, albeit growth of 8 per cent was posted in the fourth quarter.

Retail free cash flow, which is used to fund dividends and pay down debt, is a key figure. This came in at £645mn for the year, a £142mn increase on the 2022 posting, helped by a £174mn reduction in working capital. The board forecasts at least £500mn of retail free cash flow in 2024. Cash flow performance is paying off – net debt (excluding lease liabilities) fell by £285mn in the period to pivot into a net cash position. 

House broker Shore Capital said that “a 7.3 per cent free cash flow yield implies a very good value for Sainsbury’s equity” and argued that “it is clear that we are looking at a business that is expected to deliver sequential growth in earnings and dividends with board options underpinned by a strong and strengthening balance sheet”. The City values the shares at 14 times forward earnings, above the five-year average of 12 times, a rating which keeps us where we are. Hold.

Last IC View: Hold, 242p, 11 Jan 2023

J SAINSBURY (SBRY)   
ORD PRICE:280pMARKET VALUE:£6.61bn
TOUCH:279.8-280p12-MONTH HIGH:286pLOW: 169p
DIVIDEND YIELD:4.7%PE RATIO:31
NET ASSET VALUE:307p*NET DEBT:80%
Year to 04 MarTurnover (£bn)Pre-tax profit (£mn)Earnings per share (p)Dividend per share (p)
201929.02027.6011.0
202029.02555.8010.6
202129.0-164-9.4010.5
202229.985429.813.1
202331.53279.0013.1
% change+5-62-70-
Ex-div:08 Jun   
Payment:14 Jul   
*Includes intangible assets of £1.02bn, or 43p a share