Sainsbury's profits fall in first half despite inflation and cost cutting

Like-for-like sales excluding fuel increased 1.6% in the 28 weeks to 23 September, with the second quarter generating just 0.6% LFL growth from 2.3% in the first quarter as the general merchandise business showed negative growth versus last year, though still outperformed the market.

Grocery sales also slowed in the second quarter to half the growth in the Easter-boosted first, though strong clothing sales of of 6.8% across the half, outperforming the wider non-food market, were a welcome boost.

Chief executive Mike Coupe said the group said was chopping £40m more costs than previously guided and has further developed plans to of deliver at least £500m more cost saving in the next three years.

Underlying profit before tax of £251m for the half-year was down 9% compared to the previous year as sales rose by an inflation-swelled 17% to £16.3bn, as Sainsbury's underlying retail operating margin contracted by 58 basis points to 1.89% due to higher labour costs and ongoing investment in prices offset by ongoing cost savings and Argos synergies.

Coupe was confident full year PBT will be in line with the £572m consensus forecasts, which implies only a 1.5% fall on last year.

With more customers choosing to shop at Sainsbury's in the first half than ever before, Coupe said "clear results" were being shown three years into delivering his "differentiated strategy", not to mention being the first supermarket to stock edible flowers.

Changes during the half included improved offer across 15% of store space and opening a further 73 Argos stores in Sainsbury's to take the total to 112 and aiming for 165 by Christmas, in addition to 200 digital collection points and rolling out click-and-collect for Argos and clothing bought online to more stores.

"We are on track to deliver our £160m EBITDA synergy target from the Argos acquisition six months ahead of schedule."

He also pointed, as rival Tesco has recently, to "collaborating with suppliers and working hard" to reduce costs and "limit the impact of price inflation on our customers".

"While the market remains competitive, we are well placed to navigate the external environment and we remain focused on delivering our strategy. The outlook for the full year underlying profit expectation remains in line with current market consensus."

Underlying earnings per share shrank 22% to 8.7p, reflecting a full period's dilution of the new shares issued to Home Retail Group shareholders for the Argos acquisition.

Although underlying cash generation was improved, with free cash flow of £494m versus £420m a year ago, the dividend was cut 14% to 3.1p as part of the new policy of paying 30% of prior full year dividend.

REACTION AND ANALYSIS

Sainsbury's shares fell more than 2% to just over 228p on Thursday morning, almost a year's low.

Analysts at broker Shore Capital said Sainsbury’s reporting group figures "will take a little while to become used to" as traditional disclosure and segmentation is fused into the larger group post-Argos acquisition.

At a headline level the interim underlying PBT was a little ahead of consensus expectations but ShoreCap said while this year is "a bit of transitional period"... "albeit we are a little concerned" by the slowdown in second quarter trading even though overall guidance for profit guidance is unchanged.

Analyst Laith Khalaf at Hargreaves Lansdown attributed a slow summer to the drag on profits, as the industry battles various retail headwinds, including consumer spending under pressure from higher inflation and higher costs.

"The integration of Argos is progressing ahead of schedule, and this is a key plank in Sainsbury’s success moving forwards. The supermarkets are going through a period of reinvention as they try to adapt to changing shopping habits.

"Tesco is looking to buy Booker group, Morrison’s has partnered up with McColl’s and Amazon, and Sainsbury’s big chess move was the purchase of Home Retail Group last year.

"The forthcoming festive period will be a key test of whether the combination of Sainsbury’s and Argos is greater than the sum of its parts, as the convenience of visiting one location to pick up both Christmas gifts and groceries should be a tempting one for shoppers.’