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Sainsbury’s share price: what to expect from annual results

Solid results from its peers and doubts over whether it will gain approval to merge with Asda is placing pressure on Sainsbury’s ahead of its annual results. We explain what to watch out for.

Sainsbury’s Source: Bloomberg

When is Sainsbury’s earnings date?

J Sainsbury will release its annual results at 07:00 GMT on Wednesday 1 May 2019. They will cover the 12 months to 9 March 2019.

Sainsbury’s results preview: What does the City expect?

Sainsbury’s has taken drastic action to tackle the change occurring within the grocery market but it has a long way to go before convincing investors it has a business fit for the future. The rise of discount chains, changing consumer habits, the growing importance of online operations and a far from prosperous economy has forced change upon the Big Four supermarkets. Tesco has built on its scale and market leading position with its purchase of wholesaler Booker, giving it more control over the supply chain, while smaller peer Morrisons has been focused on building out its own food production business to capitalise on growth areas such as food-on-the-go and exporting.

This has left Sainsbury’s hungry for the scale it says it needs to compete, not just with the discounters like Aldi and Lidl but with its old rival Tesco. While it had put a sizable wager on diversifying the business out of food with the purchase of Argos the big bet Sainsbury’s has made on addressing the problems within its core grocery business is on a mega-merger with Walmart-owned Asda.

There is huge doubt over whether the pair can gain approval from regulators and the decision by the Competition & Markets Authority (CMA) later this year will be crucial in determining the future investment case for Sainsbury’s. Sainsbury’s had a clear sense of urgency when the deal was initially announced by stating it 'must combine' with Asda if it is to remain competitive but, as doubts over the deal have emerged, it has made a conscious effort to tone it down. That is because, if the deal is disrupted, Sainsbury’s needs to demonstrate its own viability as a standalone business. Since announcing the deal, Asda has overtaken Sainsbury’s as the second biggest supermarket in the UK, the Sainsbury’s share price has fallen by nearly 25% and it still lags behind both Tesco and Morrisons in terms of profitability and return on capital employed.

Everything you need to know about the Sainsbury’s-Asda merger as it hits the rocks’

Foremost attention will therefore be paid to any insight into the Asda merger and the chance it will be approved, followed by Sainsbury’s individual performance. It underperformed its peers in the third quarter (Q3) when grocery sales barely grew and that of non-food items actually contracted. Still, analysts expect Sainsbury’s to report a 6.2% lift in annual underlying pre-tax profit, a 4.9% rise in earnings per share (EPS) and a 2.9% increase to its dividend.

Sainsbury’s annual results expectations

Sainsbury's - Key Figures Last annual results 2018-2019 Consensus 2019-2020 Consensus
Underlying Pre-tax Profit £589 million £626 million £652 million
Underlying Basic EPS 20.4p 21.4p 22.2p
Dividend 10.2p 10.5p 10.9p

What to watch out for in Sainsbury’s annual results

Q4 LfL sales performance

Investors will be keen to see if Sainsbury’s can return to sales growth in the final quarter of its financial year, particularly after its poor performance over the Christmas period came at a time when rivals Tesco and Morrisons were gaining ground.

Sainsbury’s like-for-like (LfL) sales in Q3 was the worst on record for the year so far, or the year before. LfL sales excluding fuel fell 1.1% in Q3 compared to 1% growth in Q2 and a 0.2% rise in Q1. Including fuel, LfL sales collapsed to 0.3% in Q3 from 3.4% in Q2 and 2.6% in Q1.

Its core grocery business was the only segment to report continued sales growth in the latest quarter, but at 0.4% it was the slowest on record for a while. Grocery sales had risen 0.5% in Q1 and jumped 2% in Q2. Investors will be keen to see that both total sales and LfL sales bounced back in the final stages of the year.

Sainsbury’s suffers Christmas sales slump

Argos, general merchandise and clothing

The deterioration in the latest quarter was predominantly down to general merchandise, which slipped into negative territory with sales down 2.3% to deliver the worst performance for at least two years. Clothing sales declined 0.2% in Q3, improving from the 3.4% decline in Q2 but below the 0.8% growth reported in Q1.

Sainsbury’s admitted that the general merchandise market remains 'highly competitive and promotional' and warned margins were still under pressure. While that was not welcome to investors ears, the supermarket said Argos was outperforming the wider market. LfL sales from Argos stores inside a Sainsbury’s store in Q3 jumped 10%, which supports the view that it is weakness in the market rather than Sainsbury’s or Argos.

Quarterly and yearly performance versus its peers

The performance in Q3, which included the Christmas period, was poor compared to peers. Tesco was widely recognised as having the best Christmas period out of the ‘Big Four’ supermarkets. Morrisons reported LfL sales growth of 5.6% (excluding fuel) in Q3 and discounters – their common enemy – continued to steam ahead, with Aldi reporting a 10% leap in sales over the Christmas period. Both Tesco and Morrisons have since released their annual results which have placed pressure on Sainsbury’s to deliver a strong end to its own financial year.

LfL Sales (Exc fuel) Q1 Q2 Q3 Q4 FY
Tesco 1.80% 2.70% 0.50% 0.90% 1.40%
Morrisons 3.60% 6.30% 5.60% 3.80% 4.80%
Sainsbury's 0.20% 1.00% -1.10% ? ?

Tesco reported an 11% rise in annual revenue with 1.7% LfL growth in its core UK market, pushing pre-tax profit up 28% and allowing the firm to raise its dividend by almost double as it yields the benefits of its turnaround programme and synergies/cost-savings from buying wholesaler Booker.

Tesco annual earnings rise as turnaround plan pays dividends

Morrisons reported a mild 2.7% rise in revenue but had strong LfL sales of 4.8% for the year (nearly double the rate of the year before), pushing underlying pre-tax profit up 8.6% and prompting a higher dividend and special payout that saw shareholders sprayed with 93% more than the year before.

Morrisons pays special dividend as recovery continues

Results vs guidance and any changes in outlook

The analyst consensus for Sainsbury’s annual underlying pre-tax profit is slightly below the supermarket’s own guidance of £634 million. This implies the market expects the firm to miss expectations but also provides room for Sainsbury’s to surprise. The firm also has an ambition to deliver £200 million worth of cost-savings over the full year (FY).

Sainsbury’s expects to end the financial year with 280 Argos stores within its supermarket sites, which is likely to have been achieved considering it ended Q3 with 274. Sainsbury’s has said exceptional charges from integrating Argos will be around £140 million 'through to completion', with additional expenditure on integration to total around £130 million.

Asda merger

Whether the merger with Asda gets the go ahead or not is pivotal to the overall investment case and any dramatic update or hints it could be approved or rejected will overshadow the rest of its results. However, it is highly unlikely that Sainsbury’s will reveal anything firm to the market before regulators do, but investors can test the atmosphere and judge whether things have improved or worsened over recent weeks.

In March, the pair promised to deliver £1 billion worth of lower prices for consumers within the first three years of merging by cutting the cost of everyday goods by as much as 10% and vowed to sell off around 150 stores to allay competition concerns in areas where Sainsbury’s and Asda both overlap.

However, that is around half the number of divestments that the CMA called for in its provisional findings, demonstrating the level of disagreement between the companies and regulators. The pair claim its proposals are based on a 'more credible finding of substantial lessening of competition' and Sainsbury’s chief executive officer (CEO) Mike Coupe has previously said the CMA had 'moved the goalposts' when it came to analysing the merger, particularly after it gave the go-ahead for Tesco to acquire Booker.

How to trade Sainsbury’s annual results

A Thomson Reuters poll of 16 analysts shows there is a long-term Hold recommendation on Sainsbury’s shares (as of 23 April), with over half believing the supermarket is adequately-valued. However, there are four brokers that are more bullish on the stock.

The overall stance on Sainsbury’s has weakened since three months ago, when it had six brokers recommending a Strong Buy on the supermarket with an equal number recommending Hold.

Sainsbury’s shares: broker recommendations

Broker recommendation Number of brokers
Strong Buy 3
Buy 1
Hold 9
Sell 2
Strong Sell 1
Average recommendation HOLD

Sainsbury’s earnings: installing confidence in both the merger and the standalone business

With Tesco and Morrisons having released their own results and doubts growing over the Asda merger building, Sainsbury’s is under pressure to deliver a strong end to the year. Even if it sets an upbeat tone over its chances of acquiring Asda, investors need to focus on how the deal evolves – it is already very different from the deal that was first announced. For example, Coupe said the one thing he could 'say with certainty is that the CMA won't ask us to close stores' on the day the deal was first announced in late April 2018, which may now be regarded as misjudged confidence in hindsight. With uncertainty the deal will be completed at all and certainty that any deal that is completed will be different to the one first envisioned, investors will have to constantly revaluate the value and scope of the proposed merger.

With this in mind, Sainsbury’s needs to demonstrate the strength of its business without Asda. Sales growth is lagging its peers and its margins are also considerably lower. Sainsbury’s needs to reinstall confidence about the merger and its own business, but it will be keen to send a message that a tie-up with Asda is about chasing opportunity rather than survival.

The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer.

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