Wednesday preview: Sainsbury's reports full year results amid Home Retail deal

J Sainsbury reports its full year results on Wednesday in the wake of its agreement to buy Argos owner Home Retail Group.

The group is expected to report a drop in earnings for the year to 31 March 2016, amid fierce competition from smaller discounters and a pricing war among supermarkets.

Deutsche Bank (DB) has forecast earnings per share to fall to 22.39p from 35.72p the previous year, on revenues of £23.57bn, down from £23.75bn in 2014.

The analyst noted that the supermarket is the only one of the Big Four supermarkets to reduce promotional participation over the past 18 months.

“Downside risks include competition issues related to Home Retail Group bid, the execution risks of Argos integration if the take-over is successful, market share loss to Lidl and lower than expected profit due to negative operating leverage or price investment,” said DB analyst Niamh Mcsherry.

“We think Tesco may take the lead on price investment, pre-empting competitive action from Asda, however we feel we have factored this into our forecasts with a 0.5% year-on-year margin decline in 2016/17.”

In early April, Home Retail’s board recommended a £1.4bn cash- and-share takeover offer from Sainsbury. The deal is expected to be complete by year end.

DB expects the acquisition will generate 4.5p additional extra earnings per share in 2018/19.

Last week Home Retail reported a 28% drop in full year pre-tax profits to £94.7m as sales fell 1% . The recommended offer from Sainsbury resulted in an exceptional goodwill impairment charge of £852m, leading to a total loss after tax of £808m.

HSBC said it remains “cautious” on Sainsbury, expecting further declines in profits and dividends over the next several years.

“Argos integration will confuse the numbers for a while, but the real issue is the potential disruption Argos could bring at a crucial time,” said HSBC analyst David McCarthy.

HSBC has pencilled in earnings before interest and tax (EBIT) of £685m and EBIT margin of 2.92%, down 12% and 38 basis points, respectively.

Underlying pre-tax profit is expected to decrease to £575m from £681m last year. Dividends are projected to fall to 11.6p per share versus 13.2p last year.

“Sainsbury lacks scale compared to Tesco in an industry that is scale driven, in our view,” McCarthy added.

“We also believe Sainsbury is vulnerable to a Tesco recovery that is gaining momentum. To combat this, Sainsbury is buying Argos with the expectation it will be a game changer.”

Wednesday 04 May

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