Sainsbury's Forecasts £500m+ Impact On Profit

Sainsbury's has reported preliminary results for the 52 weeks ended 7 March 2020 and updated on the impact of COVID-19.

Preliminary Results

• Underlying profit before tax down two per cent to £586 million; profit before tax up 26 per cent to £255 million
• Strong Free Cash Flow and non-lease net debt reduction of £343 million, in line with guidance
• Grocery sales improved through the year, following investment in the customer offer, resulting in outperformance of main peers
• Customer service scores consistently improving, reflecting store investments and digital innovations
• Limited impact of COVID-19 on these results due to year end timing

Strategic highlights

• Improving grocery sales, outperforming our main supermarket peers, driven by investment in low prices, entry price point ranges and new and improved products. We were named the UK’s cheapest supermarket for branded groceries in 2019 by Which? consumer magazine
• Sainsbury’s customer service scores consistently increasing as customers respond to improvements in 451 supermarkets and 362 convenience stores and rollout of technology including SmartShop 
• Groceries Online sales grew 7.6 per cent, Convenience grew 1.3 per cent and supermarket sales declined 0.1 per cent, impacted particularly by general merchandise sales declines
• General Merchandise markets remain challenging, with weakness in toy and gaming categories. Clothing grew 1.2 per cent and performed well online, growing 47 per cent 
• We are making progress against our five year Financial Services strategy. We stopped underwriting new mortgages, are simplifying our product portfolio and reducing costs
• We launched our ambitious plan to invest £1 billion over 20 years to become Net Zero for greenhouse gas emissions by 2040 across all our operations by 2040
• Following Mike Coupe’s retirement, Simon Roberts will become Chief Executive Officer on 1 June

Financial highlights

• Underlying profit before tax down two per cent to £586 million year on year. Underlying profit was up eight per cent in the second half, following a 15 per cent decline in the first half due to phasing of cost savings, higher marketing costs and tough weather comparatives
• Statutory profit before tax of £255 million, up 26 per cent from £202 million and statutory profit after tax of £152 million, down from £186 million, due to a higher tax charge
• Strong cash generation with retail free cash flow of £611 million, up 34 per cent year on year
• Retail underlying operating profit down four per cent to £938 million
• Financial Services underlying profits up by 55 per cent to £48 million
• Non-lease net debt reduced by £343 million, in line with guidance to reduce non-lease net debt by at least £300 million in 19/20
• Underlying net finance costs reduced by five per cent to £400 million
• Underlying basic earnings per share decreased 4.3 per cent to 19.8 pence per share

Dividend

Given a wide range of potential profit and cash flow outcomes, the Board believes it is prudent to defer any dividend payment decisions until later in the financial year, when there will be improved visibility on the potential impact of COVID-19 on the business. 

View the full presentation here.

COVID-19 Update

At this very early point in our financial year it is impossible to predict the full nature, extent and duration of the financial impact of COVID-19 over the course of the year and there is a wide range of potential profit outcomes, both short and medium term. 

We have modelled a broad range of scenarios. Our base case assumes that lockdown restrictions will have eased by the end of our first quarter (end June), but that the business will continue to be disrupted until the end of the first half (mid-September). We also assume that consumer demand, particularly for general merchandise and clothing, will be impacted by weaker economic conditions thereafter. Sales assumptions are provided later in this statement. Under this scenario we would expect Group underlying profit before tax for the year to March 2021 to be broadly unchanged year on year. This includes a profit impact of over £500 million due to significant costs associated with protecting customers and colleagues, weaker fuel, general merchandise and clothing sales and lower financial services profitability, broadly offset by stronger grocery sales and approximately £450 million business rates relief. We have decided not to take up the government’s offer of furlough payments or delaying VAT payment.

There are many sensitivities that sit behind these assumptions, above and beyond the duration of different stages of lockdown and there is not necessarily a linear relationship between the duration of COVID-19 impact, costs incurred and sales impact. Hence we cannot be more certain of this base case scenario than any other. It is simply our best estimate on each of the assumptions at this stage. Sales, profit and cash flow could be additionally impacted in the event of further periods of lockdown; the cost of protecting colleagues could exceed current estimates; colleague absence and/or measures to protect colleagues and/or customers could reach levels that make it necessary to restrict the number of sites that we are able to keep open and/or services we are able to offer. Consumer spending across grocery, general merchandise and clothing and the profitability of our financial services business could additionally be more heavily impacted by the longer-term impact of COVID-19 on the UK economy than we have assumed. 

We have used more negative scenarios in stress-testing for financial viability purposes. Even with additional stress, we are confident that we have sufficient cash and committed funding in place to meet our obligations for the foreseeable future.  

However, given the wide range of potential profit and cash flow outcomes, the Board believes it is prudent to defer any dividend payment decisions until later in the financial year, when there will be improved visibility on the potential impact of COVID-19 on the business. 

Mike Coupe, Chief Executive Officer, said:
“The last few weeks have been an extraordinary time for our business. First and foremost, I want to say thank you to all of our colleagues. They have shown outstanding commitment and resilience over the past few weeks and I am in awe of their adaptability and the efforts they have made to continue to serve our customers. Across every part of the business, colleagues have played their part as we have done everything possible to feed the nation and to prioritise those who are least able to access food and other essential services. This is an unsettling time for everyone, but I am incredibly proud of the way the business has responded, continually adapting and responding to customer feedback. We will continue to work hard to provide food and other essential products to households across the UK and Ireland who are adapting to a new way of living.”  

Source : Insight DIY Team and Sainsbury's

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