Wednesday preview: Sainsbury's reports first half results

J Sainsbury is expected to report a drop in first half earnings on Wednesday as the company integrates newly-acquired Argos and grapples with a weaker pound and competition among supermarkets.

Deutsche Bank has forecast underlying earnings before interest and tax of £350m, down 4% on the same period the previous year. Underlying pre-tax profit is estimated to decline to £284m from £308m, while sales are projected to dip slightly to £12.40bn from £12.41bn.

However, Deutsche rated Sainsbury’s at ‘buy’, saying it sees a “strong long-term value creation story” through its acquisition of Argos earlier this year.

The supermarket’s chief financial officer John Rogers has been appointed the chief executive of Sainsbury’s Argos. The group has poached the chief executive of Poundland, Kevin O’Byrne, to replace Rogers.

Sainsbury’s purchased the general goods retailer to broaden its product range in the face of fierce competition among supermarkets.

The four major supermarkets, including Sainsbury, Tesco, Morrison and Asda, have been involved in a long-running price war as smaller discounters Lidl and Aldi take over market share.

Deutsche believes factors driving UK food retail prices among supermarkets include food price inflation, competition from discounters and the recovery of Asda.

“We think food inflation and discounters are dominating sentiment (both positively), whereas we believe Asda will be more material for long-term share price performance,” the bank said.

“Hence we remain relatively cautious on the UK sector, with Sainsbury’s as our only Buy.”

Deutsche expects Sainsbury’s to be least impacted by the recovery of Leeds-based Asda, due to its bias towards operating in London.

Although the bank said Sainsbury’s downside risks include the execution of the Argos integration, higher pension deficit and profit decline due to negative operating leverage or gross margin pressure.

Wednesday 09 November

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