Sainsbury’s share price: 4 things to watch out for in its full-year results

After having its planned merger with Asda shot down by regulators, the British supermarket chain must find new ways to fight off competition from rivals, with investors eagerly awaiting its full-year results for answers.

Sainsbury's will release its annual result on Wednesday, with investors eager for an update on how the company plans to drive growth after regulators blocked its planned merger with Wal-Mart-owned Asda amid an increasingly competitive and challenging grocery market.

What next after Asda merger blocked?

Last week, Sainsbury’s suffered a major blow ahead of its full-year results after the UK Competition and Markets Authority (CMA) chose to block its planned merger with Asda.

The watchdog blocked the merger on the basis that the marriage would have resulted in lesser product options and higher prices for consumers. The CMA also felt that the deal will result in a ‘substantial lessening’ of competition both at the national and local level.

The decision brings an abrupt end to a merger that would see the pair have sufficient size and scale to overtake rival Tesco as the number one supermarket chain in the UK market.

Even though both supermarket giants have now taken the merger off the table, Sainsbury's chief executive Mike Coupe contended with the CMA’s views in a statement, stating that that the merger sought to ‘lower prices for consumers’, and added that the competition watchdog has ignored the 'dynamic and highly competitive nature of the UK grocery market’.

Investors will now be looking intently at Sainsbury’s upcoming trading update for guidance on how the business plans to drive growth amid a highly competitive and challenging grocery market.

Sainsbury’s guidance

The British supermarket chain underperformed its rivals in its third quarter, with grocery sales growing marginally, while non-food items contracting.

However, analysts still expect Sainsbury’s to record a 6.2% increase in its annual underlying pre-tax profit, as well as a 4.9% rise in earnings per share and a 2.9% uptick in its dividend.

Will Sainsbury’s sales performance improve?

Investors will be keen to see if Sainsbury’s record strong sales growth in the final quarter of its financial year, after a disappointing set of results over the Christmas period, which saw rivals Teso and Morrisons both outperform it.

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.

Meanwhile, 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.

Argos sales boost while general merchandise margins under pressure

Sainsbury’s lacklustre Q3 was driven by a slip in general merchandise sales, with the business seeing revenues fall 2.3% and helping the supermarket deliver its worst performance in the last two years. Meanwhile, clothing sales fell 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.

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