Sainsbury's takes the pain

As is often the case, the early stages do not look pretty. The group had one-off costs of £229m for the first half of the year, pushing statutory pre-tax profits down to just £9m. Just over £200m of the costs were related to the property review, and management expects total expenditure to come in at between £230m and £270m. Still, nobody could accuse the group of sitting on its hands. It has already improved 172 of the 450 supermarkets it plans to complete this year, along with 158 of the 200 convenience stores. 

While this is happening, the trading environment remains difficult. Grocery sales fell 0.1 per cent in the face of tough comparatives, but began to grow in the three months to September. However, similarly to Marks and Spencer (MKS), non-food was where the group saw most of its challenges. General merchandise sales fell 2.5 per cent, while clothing was down 1.2 per cent. Overall the retail business’s underlying operating margin was down 32 basis points, at constant fuel prices, to 2.95 per cent. 

Sainsbury's has been expanding its Nectar rewards programme to improve customer retention, and it became the UK’s largest loyalty scheme in the period, with 18m customers. It signed up petrol station group Esso as a partner and launched a new app, which already has 2.1m users.

Despite the challenges, management cut the target dividend cover - albeit modestly - to 1.9 times underlying earnings from a multiple of 2. It has taken this step to “offset the dilutive non cash impact of IFRS16” on earnings, but as broker Shore Capital notes: “This is not a welcome development for shareholders!”

Bloomberg consensus is for adjusted EPS of 19.8p for the full year to March 2020, down from 22p for last year.