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We were delighted to welcome Sainsbury’s plc’s Head of IR, James Collins, to present to private investors at yesterdays’ webinar. To watch the recording please click here. The half year numbers were released on November 5th (RNS here) and a strategy review was announced simultaneously. The latter topic formed the bulk of the presentation to give more flavour as to the future direction of the company.
A brief overview of the half year numbers shows the underlying profit before tax at £586m on sales of £31.8bn reflecting the thin margins in this sector. However, food sales grew at 10.5% in Q1 and 5% in Q2. Clothing has suffered through lockdowns, but the Tu clothing brand has still outperformed the sector. The strong FCF has helped to deleverage the business c. £600m in the period and although the final dividend was postponed at the end of the last financial year due to the uncertainties surrounding the business, this has now been paid.
Sainsbury’s overall has been a beneficiary of Covid as sales across nearly all segments of the business have seen growth in H1. Grocery sales increased as the consumption of food moved into the home versus eating out during lockdowns. An increase in costs of £290m to protect staff and customers and operational cost increases to manage Covid requirements have been, to some extent, netted off by the business tax relief of £230m. This relief is not expected to be repaid to the Government given the high spend on Covid related costs. Across all of retail, the likelihood of business rate relief repayments occurring is unlikely as the line to draw as to who should repay and who should retain their relief is moot.
The financial services part of the company, Sainsbury’s Bank, is the worst performer as lower lending volumes, a reduction in the ATM business YoY and the travel money business Covid impact have all combined to take the division into a loss.
A net debt reduction of £750m by the end of the FY 2021/22 is planned into the forecasts for the company. There has already been a deleveraging of c.£1b from the £2.125bn net debt levels of 2015/16. This year there has been a £343m reduction in debt thus far, and this trend is set to continue as part of the strategic review of which, more later.
Argos saw growth of c. 11% in H1 this year, even with stores closed, as around 90% of sales are generated online. It remains the 3rd most visited eCommerce site in the UK. As per the press headlines, this is where some of the biggest changes have occurred in the strategic review.
In June this year the new CEO, Simon Roberts replaced the outgoing Mike Coupe. James Collins acknowledged that Covid was a challenging time to undergo a strategic review of this nature. However, the dramatic shift through lockdowns into digital / online sales leant solidity to the undertaking. The landscape has changed significantly, and Sainsbury’s know they need to develop to keep ahead of the pack.
Using copious quantities of customer feedback attained through sales data and the Nectar scheme, the priority plan is to focus on profitable assets and scale the food operations. Over the next 3 years, there will be 1) a stronger focus on food by bringing innovation and value to customers through buying better and reducing costs. 2) The brands they own will be shown tighter focus: grocery, the bank, Nectar and Argos – they all have to deliver better profitability. 3) Costs are the third area of focus with 200bps of operational efficiency improvement as the goal for the next 3 years.
The introduction of 7 key performance metrics will help deliver this plan to customers and shareholder by driving stronger financial outcomes. Operationally, strong customer satisfaction, employee engagement and delivering the net zero commitments are key. Financially, the growth of underlying profit before tax, growing grocery market share, the 200bps reduction in retail operating cost to sales and retail FCF of £500m pa on average all create the 4 financial metrics that will drive this new strategy forward.
The digital upsurge in the business was already growing apace pre Covid. Click & Collect, home grocery deliveries and Argos are all beneficiaries of us staying at home more. Now 20% of sales are derived from Click & Collect, orders per van have increased 35% this H1, the average basket size online is up 17%, and the productivity of items picked per hour has recovered through the first half. James envisages that this rapid growth will stabilise and perhaps drop back a little through the next financial year however, the working model for Sainsbury’s means that their assets are flexed in a way which means stores can serve customers in person or online equally efficiently. The stores can be modified if necessary, to allow the online picking to take more floorspace, or vice versa, depending on the demand.
Digitalisation puts some pressure on margins. Deliveries squeeze the thin margin model even further. New initiatives such as the new lower £1 charge for a 4-hour delivery slot go some way to fill the low demand periods efficiently and the overall increased volumes in deliveries should also narrow this gap.
This shift-change and recognising the need to adapt is why for the Argos brand the majority of stand-alone stores have been closed and more Argos collection points/ store in store set-ups have been introduced into Sainsbury’s stores. Walk-in shopping at Argos is less than 20% of all sales and is falling. Adaptation was needed and accelerated through Covid habit changes. This should see a £105m profit improvement for Argos as a lower cost operating model is introduced.
Sainsbury’s Bank has had a disappointing performance. The returns are ‘unacceptable’ according to James at present, which was very honest of him. The strategic review recognises this weak point and will see long term commitment to transform the business. Over the next 5 years, there will be no capital input from the group, with plans to double the UPBT, achieve double digit ROCE, the bank will become cash generative, the cost base will be transformed and there will be a reduction in the risk profile to the group by stopping mortgages and stabilising the balance sheet. A redirection of focus back to the current customer base will also happen all in the name of profitability.
The output of the changes emanating from the strategic review should see £600m of additional headroom which will provide the ability to continue to deleverage, invest in the company, drive returns and pay dividends. All of these actions are to be in a 3 to 5 year timeframe.
Looking at the competition, the customer satisfaction surveys still show Sainsbury’s ahead of the rest of the sector and maintaining their lead. Asda is set to continue the price-drop value model and Aldi and Lidl have already made their impact felt over the last 6 years of their major rollouts nationwide. Sainsbury’s has a more SE focussed customer base with higher population densities and wealth and they have tailored their business model to reflect this customer base.
The company’s net zero commitments primarily through transport changes, store adaptations and refrigeration will be seen in incremental alterations with step changes over time. This is a long-term plan with a 2040 end game in mind.
Automation for the Click & Collect model is unlikely currently as the efficiencies don’t financially play out at this time. There is potential in the idea of automation however, at present, the picking of online deliveries is almost 100% manual and with the current operational architecture in place this is generating a highly efficient output.
This presentation was a very well executed deep dive into the performance and outlook for Sainsbury’s. James Collins was excellent, and we applaud the company for making the time for private investors.
To watch the webinar recording please click here. If you want to be informed of upcoming Yellowstone Advisory webinars then please email info@yellowstoneadvisory.com