The retail & food sector has been tough over the past few years & this is set to continue.

Today [3rd May 2017], Sainsburys reported its Preliminary Results for the 52 weeks to 11 March 2017 in which the company claims “a pivotal year for the Sainsbury’s Group“.

However, words are words, with the matters of fact being the bottom line. Profit before tax was £503 mill (for the 2016/2017 year) compared to the £548 mill (for the 2016/2016 year). That is a fall of 8.2%. Furthermore, the basic earnings per share fell from 23.9 pence to 17.5 pence (a 26.8% drop), leaving the company trading as a multiple of 15 x earnings (based on todays price of ~ £2.60).

Whilst the earnings multiple is not in itself excessive relative to comparable stocks nor the index (the FTSE 100 is 25 x & the midd 250 is 18 x), one has to consider the economic environment that the company is operating in. The primary headwind appears to be the growth of the discounters (such as Lidl & Aldi) which are continuously taking market share from the top 4 according to Kantar data.

Sainsburys (as opposed to the other three, Tesco, Asda & Morrisons)  has made a move in terms of diversifying with the purchase of Argos. The company reports it has opened 59 Argos Digital stores in Sainsbury’s supermarkets and they are performing well. This comes with an £160 million EBITDA synergy target by Mar 2019. The company has also reduced it’s net debt from £1,826m to £1,477m, so if these factors play out according to plan, the credit metrics of the company will certainly look robust although it should be noted that a 1% loss of market share would more than offset the synergies and they could even be seen as a distraction by some shareholders.

The final dividend is 6.6 pence per share, bringing the full year dividend to 10.2 pence per share, reflecting a dividend policy of 2.0x cover. Whilst not amazing, the dividend yield is approximately 4% with current numbers which is inline with other “reliable” dividend paying stocks.

5 pillars

The company sets out 5 pillars in it’s November 2014 strategy. These are as follows:

1. knowing its customers better than anyone else
2. great products and services at fair prices
3. being there for its customers whenever and wherever
4. colleagues making the difference
5. its values making it different

To date, it is questionable as to if Sainsburys has exceeded any of its peer group in any of the above.

4 priorities

The company goes on further to state Four key priorities:

1. Further enhance its differentiated food proposition
2. Grow General Merchandise and Clothing and deliver synergies
3. Diversify and grow Sainsbury’s Bank
4. Continue cost savings and maintain balance sheet strength

Metrics have been set for these and there is observable evidence that some of the goals will be met.

Summary

How should shareholders take the announcement ?

The answer is, hold, wait and see. Whilst the profits were down (on the previous year), the company still offers good value relative to its peer group and if the company can meet it’s targets, this could present reasonable upside.