Sainsbury's expected to post drop in profits

Sainsbury’s will announce its first-half figures on Wednesday 12 November, and traders are expecting a decline in profits of 12.5%.

Sainsbury's logo
Source: Bloomberg

Sainsbury’s is feeling the squeeze from deep discounted retailers like Lidl and Aldi. The UK supermarket will announce its first-half results on Wednesday 12 November, and traders are expecting underlying pre-tax profits £350 million. At the beginning of October the company announced a third consecutive drop in quarterly sales and yesterday there was another announcement that first-half figures wouldn’t be too hot. The supermarket chain is working hard to manage expectations; traders are anticipating a cut to the dividend and more of a focus on convenience stores, the clothing division and online sales.

CEO Mike Coupe took over from Justin King in July. Mr Coupe had big shoes to fill after the supermarket underwent nine consecutive years of annual sales growth while being run by his predecessor Mr King, who was accredited with making Sainsbury’s ‘great again’. I doubt shareholders will hold it against Mr Coupe if he announces a first-half fall in profits, but its not a great start to his new leadership of the company.

Equity analysts are a touch on the bearish side when it comes to Sainsbury’s. Out of the 24 recommendations, six are buys, ten are holds and eight are sells, with the average target price of £2.62. Having one third of all the broker ratings as sells is high even for the supermarket sector —  out of the big four supermarkets, only WM Morrison has a higher percentage of sell ratings, sitting at 56%. Equity analysts aren’t exactly bullish on Tesco and Marks & Spencer either, with companies having 23% and 26% of sell ratings respectively.

Dealers are expecting first-half revenue of £12.49 billion and earnings before interest, taxes, depreciation and amortization of £694 million.

Sainsbury’s will announce its full-year figures in May of next year. The consensus is for revenue of £24.02 billion and adjusted net income of £541 million. In May of this year, the company announced full-year revenue of £23.96 billion and adjusted net income of £623 million. It is worth noting that all of the big four supermarkets have bounced back from last month’s lows. M&S has made the speediest recovery after posting an increase in first-half profits last week when the market was anticipating a decline. Could Sainsbury’s be in for something similar?

The share price is off-the-lows of last month and is gathering upward momentum. The stock is resting above the 50-day moving average, and if the recent high of £2.75 is cleared then the 100-DMA of £2.83 would be the next target. To the downside, the immediate target is £2.40 and below that, the October low of £2.23. 

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