Sainsbury's drives top line sales growth and raises profits guidance but questions remain over margins.

Sainsbury’s delivered a decent set of Christmas numbers with like-for-like sales growth a shade ahead of market expectations, but it still seems to be underperforming competitors in terms of sales growth in its core business.

Underlying profit guidance has been revised moderately higher which is a plus but worth noting that this is down entirely to Argos synergies being ahead of previous expectations. No word on margins, which as previously flagged, is a concern after dropping sharply in H1. Retail underlying operating margin declined by 58 basis points year-on-year to 1.89 per cent (2016/17: 2.47 per cent) in H1. Pressures remain  and management stuck to the now de rigueur in retail updates mantra that the ‘market remains challenging’. Top line growth is easy enough to deliver when you have inflation but retail is all about margins and that is where there is a concern.

First, LFL sales excluding fuel in the third quarter climbed 1.1%. Whilst positive – and we note that Sainsbury’s enjoyed a record Christmas trading week - it does appear to be lagging competitors. Morrisons group LFL sales excluding fuel were up 2.8% in the ten weeks to Jan 7th 2018, and up 3.7% over the last six weeks against very strong comparators.  Lidl and Aldi enjoyed growth of 15-16% in December. 

Sales growth in groceries was solid, climbing 2.3% and this was driven by a commendable online performance where Groceries Online enjoyed an 8.2% rise in sales. Online growth is good and we note that the roll-out of same day delivery continues apace, which is proving an important weapon in market place against Amazon etc. Argos sales remained light and General Merchandise sales declined by 1.4%. Overall total retail sales ex-fuel and ex the sale of Pharmacy business, rose 1.2%.

Underlying profit is expected to be moderately ahead of previous consensus forecasts for £559m, which was down from the £572m consensus in June 2017.

Not to take too much away from a solid performance by management, this is down to accelerated cost synergies from the Argos acquisition. Savings will be around £80m-85m by March, up from the previous estimate for £65m worth of synergies. As a whole, the group is on track to achieve £185m of cost savings this year, which puts it ahead of the three-year target of £500m by £40m. Based on the extra £15-£20m from Argos synergies that would suggest FY profits in the region of £575m.

Looking ahead to tomorrow's release from Marks & Spencer, we note that there have been a couple of announcements over the last two days from management that appears to suggest an acceleration of efforts to turn things around. Whether it not it bodes well or badly for the Christmas trading update is unclear but what we know is that the consensus expectations are low. Clothing & Home expected to be -3%, Food -1% and any weakness is well flagged.

Yesterday MKS announced a technology transformation programme expected to cut costs by £30m over the next 3 or 4 years with a one-off implementation cost of £25m. These are fairly small fry - what matters is whether this will result in the much-needed and long overdue overhaul of online service. Waiting ten days or more for your kid's school shoes to arrive used to be acceptable - in a world of next and even same-day delivery it is not good enough any more.

The other announcement - which is not yet official - is that Dixons Carphone finance director Humphrey Singer will join as the new CFO to replace the outgoing Helen Weir.

Retail calendar:


AO World plc (AO.) (BOO)
Booker Group plc (BOK)
Marks & Spencer Group plc (MKS)
Tesco plc (TSCO)
John Lewis and Waitrose Christmas trading update

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