Sainsbury(J) PLC Half-year Report

Operational Highlights

·    Underlying profit growth of £51 million driven by Argos synergies, delivered ahead of schedule

·    Food and general merchandise sales benefited from the hot summer; grocery sales grew 1.2 per cent and general merchandise sales grew 1.5 per cent, with total food transactions up 0.6 per cent, outperforming the market¹

·    Continued pressure on general merchandise margins

·    Clothing sales declined 1 per cent due to changes in promotional phasing

·    Groceries Online grew nearly 7 per cent and Convenience grew over 4 per cent

·    We have transformed the way we run Sainsbury's stores, fundamentally changing how our 135,000 managers and colleagues work. The new, leaner management structure creates significant savings which we have reinvested into colleague pay. We now have one fair, consistent and more flexible contract for all Sainsbury's store colleagues and pay them a market leading rate of £9.20 per hour

·    We are maximising the productivity of our supermarket space. Adding Argos stores in Sainsbury's and repurposing our food space in a number of our stores is driving an increase in trading intensity²

·    We opened 60 Argos stores in Sainsbury's supermarkets in the half, bringing the total to 251 and they continue to trade well. We also have 233 order collection points in supermarkets and convenience stores 

·    During the half we delivered Argos EBITDA synergies of £63 million (£58 million EBIT), bringing the cumulative total to £150 million EBITDA

·    Since the half year we have realised the £160 million Argos EBITDA synergy target, nine months ahead of the original schedule

Financial Highlights

·    Group sales of £16,884 million, up 3.5 per cent

·    Retail sales (excluding fuel) up 1.2 per cent

·    Like-for-like sales (excluding fuel) up 0.6 per cent

·    Underlying profit before tax growth of 20 per cent, from £251million to £302 million

·    Profit after tax of £144 million, down 13 per cent from £166 million, reflecting further non-underlying charges relating to restructuring our store management teams, Argos integration, Sainsbury's Bank transition and the proposed combination with Asda

·    Bank profits down 53 per cent to £16 million, in line with full year guidance

·    Cost savings of £121 million

·    Underlying earnings per share up 18 per cent to 10.3 pence

·    Retail free cash flow of £619 million, up £183 million year-on-year due to strong cash generation and timing of bank capital injections

·    Net debt was down £530 million to £834 million, in part reflecting phasing benefits which will reverse in the second half. We continue to expect year end net debt before fair value movements on derivatives to reduce by around £100 million from the March 2018 position of £1,364 million

·    Interim dividend of 3.1 pence per share, in line with our policy of paying 30 per cent of prior full year dividend

Commenting on the Interim Results 2018, Mike Coupe, Sainsbury's Group Chief Executive, said: 

“The market remains very competitive and we are transforming our business to meet rapidly changing customer needs. We have fundamentally changed how our 135,000 Sainsbury's store managers and colleagues work and I would like to thank them for their ongoing hard work through this period.

“We have delivered a solid first half performance and profit has increased because we have delivered significant Argos synergies ahead of schedule. Sales of food and general merchandise were boosted by the hot summer, but general merchandise margins remain under pressure.

“Our strategy of offering customers a distinctive range of high quality and great value food has driven like-for-like sales growth at Sainsbury's. Where we have invested to lower prices, volumes and transactions have increased.

“Our proposed combination with Asda will create a dynamic new player in UK retail, with the ability to further lower prices and to reduce the cost of living for millions of UK households. The Competition and Markets Authority is conducting its in-depth Phase Two review into the proposed combination and we continue to engage constructively with the CMA and Panel.”

Outlook

The consumer outlook is uncertain as we head into our key trading period. The grocery, general merchandise and clothing markets continue to be highly competitive and very promotional. However, we remain on track to deliver current market consensus for 2018/19 UPBT of £634 million.⁴

Dividend

Interim dividend of 3.1 pence per share, in line with our policy of paying 30 per cent of prior full year dividend. This will be paid on 21 December 2018 to shareholders on the Register of Members at the close of business on 16 November 2018.