Morningstar | J Sainsbury Reports Fiscal 2019 Preliminary Results With Higher Cost Savings Driving Profit Beat
No-moat J Sainsbury reported preliminary results for the 52 weeks to Mar 9, with group sales (excluding VAT, including fuel) at GBP 29 billion (equal to our model's) and retail like-for-like sales growth (excluding fuel) at negative 0.2% (versus up 0.4% in our model). Retail underlying operating profit increased 7.8% at GBP 635 million versus GBP 622 million in our model, principally driven by cost savings ahead of guidance (GBP 220 million versus GBP 200 million guided). Management introduced new guidance on net debt reduction (GBP 600 million over the next three years) and said it will invest to improve more than 400 supermarkets (food service, beauty trials, wellness aisles) in 2019 while maintaining its dividend policy (dividend payout of 2 times underlying earnings), but didn't elaborate on a strategy to improve negative sales dynamics. Given this broadly in line print, we do not anticipate changing our GBX 273 fair value estimate for Sainsbury's as we roll our model forward.Like-for-like sales (excluding fuel) declined 0.2% (up 1.5% including fuel) in the year, a noticeable underperformance versus Tesco's 1.7% (excluding Booker) and Morrisons' 1.5% (excluding Wholesale), with healthy growth in online and convenience (6.9% and 3.7%, respectively). The negative like-for-likes is a result of declines in general merchandize and clothing, categories where Sainsbury's has a larger exposure versus its peers because of Argos. Still, we find the implied negative volume growth disappointing, given the grocer's sizable price investments at the beginning of the year. This is in line with our initial negative assessment of the rationale behind Argos' deal, which we believed would add to the grocer's top- and bottom-line cyclicality in a post-Brexit world at a time when most competitors focus on the more differentiated food categories.
The company announced it plans a Capital Markets Day on Sept. 25, 2019 to provide an update on progress.
J Sainsbury is principally engaged in food, general merchandise and clothing retailing and financial services. Co. is organized into four operating segments: Retail (Food), which provides a range of food, including organic produce; Retail (General Merchandise and Clothing), which provides a range of products across home, clothing, technology and leisure; Financial Services (Sainsbury's Bank plc and Argos Financial Services entities), which provides products such as credit cards, insurance, travel money and personal loans; and Property Investment (The British Land Company PLC and Land Securities Group PLC joint ventures). At Mar 11 2017, Co. had 605 supermarkets and 806 convenience stores.
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