Sainsbury's expects massive profits recovery, but is it enough?

Covid-19 has hurt, but a new strategy is now being pursued and online sales are growing fast.

Full-year results to 6 March 2021

• Sales down 0.3% to £32.3 billion
• Underlying pre-tax profit down 39% to £356 million
• Covid-19 related costs of £485 million
• Final dividend of 7.4p per share, giving a total payment of 10.6p per share (unchanged)

Guidance:

• Expects underlying pre-tax profit to March 2022 to exceed that reported in the year to March 2020 (£586 million)
• Now expects to reduce net debt by at least £950 million over the four years to March 2023, up from £750 million

This first set of full-year results from the relatively new chief executive offers broad optimism for the future at Sainsbury's (LSE:SBRY).

A recovery in profit continues to be expected following the impact of Covid costs on the current year, with strong cash generation now underpinning an accelerated pace of debt reduction. Online food sales, aided by the pandemic, have grown to 17% of overall sales from 8% previously, while an increase of 68% in Argos digital sales is impressive.

However, the predicted profits recovery did not meet expectations of some of the more bullish City analysts, which has put pressure on the share price today.

New strategy

The group’s revamped strategic objectives are also playing into the outlook. Under the strategy, Sainsbury’s is now simplifying operations, saving money which it can invest into its core food offering and which should drop through to higher profits. 

Meat, fish and deli counters are being closed given waning customer demand, standalone Argos stores are being swapped for stores and collection points within Sainsbury outlets, while a focus on growing profitable online sales continues.  

Intense competition across the sector, including from discount retailers Aldi and Lidl, cannot be ignored. This latest revival plan is being pursued at a time when the competition is far from standing still. And retailing mammoth Amazon (NASDAQ:AMZN) continues to increase its influence in the world of food retail. 

That said, the latest dividend further underlines the appeal for income investors, with the shares sat on a historic and estimated forward dividend yield of over 4%. Growing online sales potentially offer management increased store flexibility in future, while, like rivals, there is room for improvement at its financial services business.

For now, market consensus opinion points to a ‘strong hold’.