Sainsbury's delivers profit rise and guarded forecast

By This Is Money
Updated: 05:50 EDT, 11 May 2011

Sainsbury's said it had outperformed in challenging conditions as it announced a 9% rise in annual earnings that beat City hopes.

Economy drive: Sainbury's is trying to keep prices low to attract budget-conscious customers

The UK's third-largest supermarket reported an underlying pre-tax profit of £665m, overshooting forecasts of £660m, in the year to March 19. Sales were up 7.1% at £22.9bn.

Shares in Sainsbury's were down 0.3p at 355.5p in morning trading.

Sainsbury's said it had made cost savings to keep its prices low for cash-strapped consumers, as household budgets came under significant pressure from price inflation.

This helped its share of the grocery market increase to 16.3% from 16.1% a year ago.

Meanwhile, non-food sales increased at three times the rate of Sainsbury's food sales, as it enjoyed strong growth in areas such as books and DVDs. Sainsbury's now claims its TU brand is the seventh largest clothes retailer in the UK.

Average customer transactions rose to 21m a week, up 1m on a year ago. The Sainsbury's Local convenience store arm broke through the £1bn sales barrier for the first time, and the supermarket's online grocery delivery business grew by 20%.

Sainsbury's Bank also put in a strong performance after operating profits increased by 50%.

The company's growth was boosted by 68 new stores, bringing its total to 934. Many of these were opened in Scotland, the South West and Wales where the supermarket was under-represented, while it also extended 24 stores, mainly in the South East.

Of its new store openings, 47 were convenience stores - which are typically showing faster sales growth than the supermarkets - bringing its total to 377.

Sainsbury's said today that its 124,000 staff will share a bonus pot of around £60m, compared with more than £80m last year.

The supermarket's annual dividend was hiked 6.3% to 15.1p.

Looking ahead, chief executive Justin King said: 'We expect the economic environment to remain uncertain over the coming year. We remain confident that our strategy, alongside continued strong operational performance, will enable the business to make further good progress.'

View from the City

'The profit before tax of £665m is up 9%, which is a tad ahead of expectations, but profits growth remains mediocre compared to the lower-rated Morrison's,' said Nick Bubb of broker Arden Partners. 'Despite the £10.5bn of freehold property, the shares look no better than fairly valued.'

Graham Spooner of online broker The Share Centre said Sainsbury had joined several other retailers in stating the outlook remains uncertain for the industry.

'For us, Sainsbury's is solid enough but we do remain cautious and continue to list it as a "hold". Our preferred play within the sector is Tesco due to its attractive international earnings, good cash flow and the potential for sustainable growth,' he added.

Analysts at broker Oriel Securities said: 'Sainsbury's prelims are bang in line with our numbers, which were towards the top of the forecasting range. However there are lots of words but not much new news here and we'd expect minimal reaction from the shares.

'Management's outlook statement is very similar to that of most retailers: they are cautious but remain confident in the model.'

Tom Gadsby of asset manager Matrix said: 'The company says that it has added market share in the year, which is true, but share has declined from a peak in December.

'With top-line growth slowing and a price/earnings valuation 10% ahead of the UK sector, we see the shares as overvalued and maintain our reduce rating.'