However, the group’s underlying profit before tax of £251M was down 9%, which it claimed reflected price cuts it had introduced, combined with the impact of wage cost inflation and consolidation of Argos half-year losses, although it said these were partly offset by cost saving synergies.
Sainsbury’s group sales of £16.3bn were up 17%, primarily reflecting the full consolidation of Argos in the first half of the 2017/18 financial year. And like-for-like sales (excluding fuel) were up 1.6%.
Improved food ranges
Over the period, Sainsbury had introduced 70 new and improved food ranges and opened 112 Argos stores within its estate. The retailer also exceeded cost savings target and will now deliver £540M over three years ending 2017/18, it reported.
At the same time, Sainsbury’s online grocery sales grew by 7.2%, while convenience store sales were up 8.2%.
“We have delivered a good performance across the Group in the last six months, with more customers choosing to shop at Sainsbury in the first half than ever before. We are now three years into delivering our differentiated strategy and are seeing clear results,” said the company’s group chief executive Mike Coupe.
“We are adapting to meet customers’ changing shopping habits and, as a result, we are seeing positive momentum across the business. This half we have updated and improved 70 of our food ranges, covering around 40% of our food sales; improved our offer across 15% of our supermarket space and opened a further 73 Argos stores in Sainsbury’s, giving customers more reasons to shop at Sainsbury.”
“We continue to focus on offering our customers great value, supported by our removal of multibuys. Customers can shop at Sainsbury knowing they get good value every day without having to wait for products to be on promotion. We are also collaborating with suppliers and working hard within our own business to reduce our costs and limit the impact of price inflation on our customers.”
Analysts’ concern
Commenting on the results, Clive Black, an analyst with stockbroker Shore Capital, remarked: “Sainsbury’s FY [financial year] 2018 interim results are slightly ahead of our expectations. However, Q2 [second quarter] Group like-for-like sales were materially slower than Q1 (2.3%) at 0.6% and behind our expectations.
“We see this performance as a little concerning as Sainsbury needs to deliver sound revenues to fully harvest anticipated synergies from the Argos acquisition and ongoing cost savings.
“Group trading profit amounted to £306M (SC [Shore Capital] forecast: £292M) with Group PTP [pre-tax profit] coming in at £251M, a 9% fall (SC forecast: £241M).
“With management guiding to an expectation to meet prevailing consensus, following this update we are not adjusting our FY2018 PTP estimate of £585M (EPS [earnings per share]: 19.0p) whilst we forecast a DPS [dividend per share] of 9.5p (an implied yield of 4.1%) two times covered by EPS. Our positive stance on Sainsbury’s stock has been predicated upon the delivery of a broadly stable Grocery business and harvesting of Argos synergies.”
Fiona Cincotta, senior market analyst at City Index, added: “Profit has come in ahead of consensus expectations but this is a mixed bag result that’s far from perfect.
“On the bright side, Sainsbury is running well ahead of its cost-saving targets following the Argos acquisition. But that progress has been offset by a significant slump in sales growth.
“Continued cost inflation, combined with intense competition from German discount retailers and a resurgent Morrisons, are clearly taking a toll on margins. For the half-year, Sainsbury’s underlying retail operating margin has contracted by 58 basis points to 1.89%.
“The extra cash generated from cost savings will at least give management more firepower to invest in its offering in the lead up to Christmas. They'll need it.”
Sainsbury will report its 2017/18 15 week third quarter trading statement on January 10 2018.