Sainsbury’s trading performance for Q1 FY21 was ahead of our expectations. The momentum was led by grocery and general merchandise segments. As positive developments, the grocer managed to gain market share and also improved the annual profit guidance. Although the H2 FY21 performance is likely to be softer due to tough comparables, the business should be able to achieve its mid-term targets of a 200bp increase in profitability and FCF of £500m. We will increase the target price.
Companies: J Sainsbury plc
Sainsbury’s Q3 FY20/21 trading performance was slightly ahead of our estimates. Lfl sales improved 8.6% (ex-fuel), with the Christmas period particularly strong with 9.3% growth. On a positive note, management expects underlying profit before tax of at least £330m for FY20/21 (vs market consensus of £275m). The grocer’s success in gaining market share is a step in the right direction. However, further steps are required to improve the pricing and perception.
Sainsbury’s performance during the Q3 and Christmas period was in line with our estimates. The resilience of the food business was comforting but weakness in GM (especially in toys and gaming) was a spoilsport. Online continues to gain strength and management’s plan to increase its contribution to 30% in the mid-term (vs c.20% today) is a step in the right direction. We will tweak our estimates slightly upwards.
Despite a weak start to the year, management is trying to revive consumer demand. This includes steps like investing in essential goods and groceries. While it is a positive step, much more needs to be done. Confirmation of FY19 PBT consensus is a comforting factor. No change in stock recommendation.
The FY18/19 ended on a positive note (earnings were ahead of consensus but in line with our expectations). Despite cost savings, the grocery business remains under pressure, and management needs to stem the market share erosion. Argos delivered synergies ahead of schedule and the reduction in net debt is also a positive development. A revival in banking profits and a grocery sales uplift would be crucial stock price triggers in our opinion. We maintain our positive stance due to the cheap valuat
CMA has released provisional findings on the proposed merger between Sainsbury’s and Asda, which states that the deal could: 1) push-up the prices and worsen the experience for in-store and online shoppers, 2) lead to a reduction in range and quality of products offered, and 3) the prices could also rise at a large number of Sainsbury’s and Asda petrol stations. The potential options set out by the UK regulator include blocking the deal altogether or requiring the merging companies to sell-off a
Negative lfl is not a surprise but the magnitude of the slump surely is. There seems to be no short-term solution to turnaround the performance of the non-food business, which puts Sainsbury’s at a much higher risk vs other competitors. We continue to believe that the proposed merger with Asda will go-through, albeit with some store disposals. A harsh verdict might make it very difficult for Sainsbury’s to extract much desired cost savings and a simultaneous cut in the price of essential product
Good H1 performance was a factor of the hot weather conditions nudging the top-line and better margins due to the early delivery of Argos merger synergies. However, it will be tough for management to sustain the momentum in forecast years, especially due to macro-economic uncertainty and intensifying competition (in both food and non-food space). Sainsbury’s proposed merger with Asda is yet to receive any pleasant indications from the anti-trust regulators. No change in our stock recommendation.
The Q1 performance was softer than our expectations. Management’s strategy to invest in prices is vital to blunt the increasing competition in the UK. Although the shop-in-shops of Argos are performing remarkably well, the recent recovery in general merchanting and clothing is fragile, in our opinion. Any positive news from CMA (about the proposed merger with Asda) or an improvement in grocery lfl would be key upside triggers, in our opinion. No change in the stock recommendation.
Sainsbury reported a good set of FY17/18 profitability numbers, on the back of successful cost savings initiatives and Argos synergy benefits. A new round of cost savings (£500m by FY20/21) and the Asda integration (higher margin + merger synergies) are likely to nudge up the group’s EBITDA margin (5.4% by FY20/21). We have revised upwards our target price and stock recommendation (from ‘Sell’ to ‘Add’) after incorporating the Asda merger (integrated financials from mid FY19/20) and the better t
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