J Sainsbury plc (LON:SBRY) has provided its Strategy Update and Interim Results for the 28 weeks ended 19 September 2020
· Total Retail sales up 7.1 per cent (excluding fuel) with like-for-like sales up 6.9 per cent. Grocery sales up 8.2 per cent and General Merchandise sales up 7.4 per cent
· Digital sales up 117 per cent to £5.8 billion, nearly 40 per cent of total sales. Groceries Online sales up 102 per cent
· Statutory Group sales (excluding VAT) down 1.1 per cent, with fuel sales down 44.6 per cent
· Loss before tax £(137) million, reflecting £438 million of one-off costs associated with Argos store closures and other strategic and market changes
· Underlying profit before tax £301 million
· Retail costs of approximately £290 million to protect customers and colleagues from COVID-19, partially offset by £230 million business rates relief
· Free cash flow £943 million
· Non-lease net debt down by £912 million to £267 million
· Special dividend of 7.3p to be paid in lieu of final dividend for the 2019/20 financial year, aligned to policy of 1.9x full year dividend cover by underlying earnings
· Interim dividend of 3.2p, in line with policy of paying 30 per cent of prior full year dividend
· Full year underlying profit before tax now expected to be at least five per cent higher than last year, reflecting stronger than expected sales, particularly at Argos
Strategy Update: Driven by our passion for food, together we serve and help every customer
We are refocusing on our core food business, putting food back at the heart of Sainsbury’s. We will:
· Lower food prices, focusing on offering customers consistently good value
· Accelerate food innovation, tripling the number of new products we launch each year
· Profitably grow Groceries Online sales to meet further demand
· Increase the rate of new Convenience store and Neighbourhood Hub openings over the next three years
· Continue to reduce plastic and food waste and inspire customers to eat healthier products, which will be better for the climate and environment, as we work towards becoming Net Zero by 2040
· Close our meat, fish and deli counters, based on reduced customer demand. This will make stores simpler to run and reduce food waste. We will keep adding more quality and innovation in our aisles
Our other businesses and brands must deliver in their own right and actively support our ambition in food
· We are building on the success of integrating Argos stores into Sainsbury’s and accelerating the final stages:
o By March 2024 we will open up to 150 more Argos stores in Sainsbury’s and add 150-200 more Argos collection points in supermarkets and convenience stores, so that every Sainsbury’s supermarket will have either an Argos store in store or a collection point
o As we add more Argos stores and collection points in Sainsbury’s, we will close around 420 Argos standalone stores, reducing the UK Argos standalone store estate to around 100 by March 2024
· We are expanding our ambition for Habitat, which will become our main home and furniture brand in Argos and Sainsbury’s
· We are accelerating our plans for Nectar, bringing greater support for food and faster profit growth
· We expect Financial Services returns and profits to double in five years, despite the challenges of COVID-19
We will accelerate the pace of change across our business, simplifying our operations, delivering structural cost savings to support investment into our core food offer and driving an inflection in profit momentum.
· We will transform our approach to costs across the business, delivering a reduction in our retail operating costs to sales ratio of at least two percentage points by March 2024
· This will create at least £600 million of annual additional funding by March 2024 to reinvest in the customer offer and deliver improved financial returns. This will be after driving efficiencies to cover inflationary cost pressures, volume-related cost increases and the cost of meeting increasing customer demand for online groceries
· We are investing in the integration of our logistics and supply chain network and the accelerated restructuring of the Argos store estate, reducing costs and delivering working capital benefits
· Reflecting our commitments to focus our resources and move faster, we are open to partnering or outsourcing where this efficiently accelerates our plans to improve our customer offer
We expect this new plan to drive an inflection in underlying profit momentum, with pre-tax profits in the year to March 2022 to exceed those reported in the year to March 2020 (which were not impacted by COVID-19)
· We will continue our track record of strong cash generation, meeting our target of at least £750 million net debt reduction in the three years to March 2022 and generating average retail free cash flow of £500 million per year over the following three years to March 2025
· Capital expenditure will increase to between £700 million and £750 million per year in the three years to March 2024 to support high returning infrastructure transformation investments before returning to around £600 million per year
· We will incur one off costs from infrastructure, operating model and structure changes of £900 million to £1 billion in the period to March 2024 (approximately £300 million cash). We expect total non-underlying costs of around £625 million to be booked in the current financial year (around £100 million cash)
Outlook
Sales during the first half were stronger than the base case assumptions we outlined in April, particularly at Argos, driving a strong underlying profit increase against a soft comparative base. Retail costs of around £290 million associated with protecting customers and colleagues from COVID-19 were partially offset by £230 million of business rates relief.
Grocery sales and general merchandise sales have remained strong to date in the second half of the year and we expect Financial Services to return to profit in the second half. Retail profits will, however, also reflect a tougher comparative base, investment in improving value for customers and ongoing costs associated with protecting customers and colleagues from COVID-19. We cannot fully predict the impact of COVID-19 and lockdown restrictions on retail sales and costs for the remainder of the second half of the year but our current assumptions would result in full year Group underlying profit before tax increasing by at least five per cent year on year.
Looking beyond this financial year, we will invest significantly to accelerate innovation, improve the quality of our food, lower our prices and meet the growing demand for online groceries. We will fund these investments through simplifying our business and accelerating our cost savings plans and expect underlying profits in the year to March 2021/22 to be higher than those reported in the year to March 2019/201 (which were not impacted by COVID-19).
Capital expenditure will increase over the next three years to fund high-returning logistics and Argos transformation plans. We expect these projects to generate working capital improvements and expect cash generation to remain strong. We will meet our target of reducing net debt by at least £750 million in the three years to March 2022 while maintaining our dividend policy. In outer years we expect to continue our track record of strong cash generation, with average retail free cash flow of £500 million per annum over the three years to March 2025.
Dividend
In April the Board chose, due to limited visibility at the time on the potential impact of COVID-19 on the business, to defer dividend payment decisions and did not pay a final dividend for the 2019/20 financial year. In the light of improved visibility, strong trading and a strong balance sheet position, the Board has chosen to pay a special dividend in lieu of a final dividend for the 2019/20 financial year. The dividend of 7.3p is aligned to policy of 1.9x full year dividend cover by underlying earnings. This will be paid on 18 December 2020 to shareholders on the Register of Members at the close of business on 13 November 2020.
The Board has approved an interim dividend of 3.2p, in line with our policy of paying 30 per cent of prior full year dividend. This will also be paid on 18 December 2020 to shareholders on the Register of Members at the close of business on 13 November 2020.
Notes
Certain statements made in this announcement are forward-looking statements. Such statements are based on current expectations and are subject to a number of risks and uncertainties that could cause actual events or results to differ materially from any expected future events or results referred to in these forward-looking statements. They appear in a number of places throughout this announcement and include statements regarding our intentions, beliefs or current expectations and those of our officers, directors and employees concerning, amongst other things, our results of operations, financial condition, liquidity, prospects, growth, strategies and the business we operate. Unless otherwise required by applicable law, regulation or accounting standard, we do not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future developments or otherwise.
A webcast presentation will be available to view on our website at 7.30am. The webcast can be accessed at the following link: https://webcasts.sainsburys.co.uk/sainsbury157
Following the release of the webcast, a Q&A conference call will be held at 9:30am. This will be available to listen to on our website at the following link: https://webcasts.sainsburys.co.uk/sainsbury158
A recorded copy of the webcast and Q&A call, alongside slides and a transcript of the presentation will be available at www.about.sainsburys.co.uk/investors/results-reports-and-presentations following the event
Sainsbury’s will issue its 2020/21 Third Quarter Trading Statement at 07:00 (BST) on 13 January 2021.
1 2019/20 UPBT £586 million
Strategy Update: Driven by our passion for food, together we serve and help every customer
We will put food back at the heart of our business and will build on the changes we have made as we helped our customers through the COVID-19 pandemic. We are raising our ambitions and will speed up the pace of change across our business, simplifying our operations and accelerating our cost savings programmes so that we can invest more in food quality, choice, innovation and consistently lower prices for our customers. We will reduce complexity, transform our cost base and ensure that our portfolio of brands supports our focus on food, thereby improving financial performance and delivering stronger shareholder returns.
Food First
Our clear priority is to build on our strong brand heritage and reputation for quality, range and innovation and offer more consistent value to customers while making shopping more convenient. This is what we mean by putting food back at the heart of Sainsbury’s. We will deliver delicious, great value food wherever and however customers want to shop with us.
· We have lowered prices on over 1,500 products and will go much further. We will lower prices on thousands of every day food products, focusing on staple products that our customers buy every day
· We will accelerate food product innovation by recruiting more product developers. Working closely with our suppliers, we will triple the number of new products and increase speed to market by at least 30 per cent. In September we launched 200 new fresh food products as part of the biggest re-vamp of our fresh food aisles in more than a decade
· We closed our meat, fish and delicatessen counters in March as we focused all our efforts on feeding the nation. Customers have told us they are happy buying these products in the aisle. We have therefore decided to close permanently our meat, fish and delicatessen counters. Our pizza and patisserie counters remain open and we continue to freshly bake bread in 1,348 stores. These changes will help us focus on quality, value and availability, while reducing store complexity and waste
· We have more than doubled our Groceries Online capacity and volume since March. 17 per cent of our grocery sales are now online compared with seven per cent in March. We are currently fulfilling over 700,000 online customer orders per week across home delivery and click and collect. By the end of this year we expect to be able to fulfil 760,000 orders per week and we will continue to grow capacity in order to meet customer demand going forward. Our groceries online business is profitable due to its scale and in-store pick model and we will focus on driving efficiencies to continually improve profitability. Our Chop Chop one hour food delivery service is now in 15 cities across the UK and our agreements with Uber Eats and Deliveroo will help us to reach even more new customers and serve more shopping missions
· Our Net Zero sustainability plan is key to putting food at the heart of Sainsbury’s. Customers want tasty food, great quality, low prices and they want to ensure that the food they buy is having the lowest impact on the environment, now and in the future. We are committed to helping customers to eat more healthy products, which is good for them and good for the climate and the environment. We will reduce our plastic usage by 50 per cent by 2025 and reduce our food waste
· We will adapt our supermarkets and convenience stores to reflect changing shopping habits and local demand. We will expand the successful introduction of fresh food prepared on site – such as hot meals, sushi, freshly baked bread and hot coffee – and make more space available for our in-aisle fresh food ranges and food to go. To do this profitably, we will free up space, reduce complexity and cut excess costs in our supermarkets
· We plan to open around 18 more ‘Neighbourhood Hub’ convenience stores over the next three years. These stores are larger than a typical convenience store and offer locally-tailored choice across food, beauty, clothing, seasonal and general merchandise. They are conveniently located, easy to shop and have all the benefits of the Argos offer. We expect them to be very popular one-stop shops for their local communities. We will also increase our rate of new convenience store openings to at least 20 per year over the next three years
Brands that Deliver
We will refocus the role of our portfolio brands to ensure that they contribute positively in their own right, actively support our ambition in food and do not dilute returns or divert focus and resources from the core.
Argos, Habitat, Tu, Nectar and Sainsbury’s Bank will deliver for their customers and drive strong, sustainable, profitable growth to support our core food business.
· Argos sales grew by nearly 11 per cent in the first half, with 90 per cent of sales originating online and almost two million customers re-discovering Argos despite standalone Argos stores being closed for 12 weeks. Building on this success we will accelerate the structural integration of Sainsbury’s and Argos and further simplify the Argos business model, making it more efficient and profitable and improving our customer offer at the same time
· 120 of our standalone Argos stores have not reopened since we closed them back in March. These stores will now close permanently. We currently have 315 Argos stores in our supermarkets and 296 collection points across supermarkets and convenience stores. Over the next three years we will open up to another 150 Argos Stores in supermarkets and a further 150-200 collection points. In total, we will close around 420 Argos stores by March 2024, reducing the total number of standalone stores to around 100
· To support this streamlined infrastructure we will build a total of 32 Local Fulfilment Centres across the UK that will operate our fast track delivery operations, delivering to customers’ homes and to Argos stores and collection points across the country within hours. Through this transformation, we will significantly reduce our cost base and stock holding while improving speed, convenience and availability for customers
· We stopped printing the Argos catalogue as customers are increasingly shopping online. By focusing our resources on our website we are able to deliver a more modern, dynamic and flexible approach to both pricing and new products. We will continue to print the iconic Christmas Gift Guide, which is bigger and better than ever this year
· We are investing in Habitat, which will become our main home and furniture brand across Sainsbury’s and Argos. Habitat is a strong brand and, by increasing its visibility in Sainsbury’s and Argos stores and online, expanding the product range and making prices more affordable, we have a significant opportunity to grow market share
· Tu Clothing has delivered very strong online sales growth and the range is growing both value and volume market share1
· Nectar gives us a strong competitive advantage, supports our food business and is valued by our customers. It is also central to how we understand our customers because it identifies, in real time, how they shop with us and what they want. We will continue to grow our portfolio of coalition partners and build our Nectar360 digital media business
· We have made good progress with our Financial Services transformation plan and streamlined our product offer. We still expect to double profit and returns in our Financial Services business within five years, despite the challenges of COVID-19. This reflects a strong balance sheet and effective cost management and we remain confident that no capital injections will be required from the Group
1 Kantar Total Clothing, Footwear and Acc for 24 weeks to 20 September 2020
Colleague impact
We are talking to colleagues today where the changes we are announcing impact their roles. We recruit 55,000 Retail colleagues every year and have already hired 52,000 people since March, including 29,000 additional colleagues to support our efforts to feed the nation. We have many job opportunities for colleagues who work on our food counters or in our Argos standalone stores that are closing, but vacancies might not always be in the right location or at suitable hours for all colleagues. Whilst we will aim to find alternative roles for as many colleagues as possible, around 3,500 of our colleagues could lose their roles as a result of our proposals. Including these proposals, we expect to increase our colleague population by 6,000 roles by the end of the financial year. We have an excellent track record of finding alternative roles for colleagues – for example, where we have moved colleagues from Argos standalone stores to stores in Sainsbury’s supermarkets, we have retained 90 per cent of colleagues. We will do everything possible to find alternative roles for our colleagues.
Save to Invest
We will deliver a step change in efficiency by transforming our approach to costs, simplifying our organisation and delivering a structural reduction in our operating cost base. We are accelerating our cost saving plans to unlock new opportunities in order to fund the improvement of our food offer and to ensure we can meet the growth in customers shopping across a broad range of channels.
· We will simplify our business and lower the overall cost base in our operations. We will deliver a step change reduction in our retail operating costs to sales ratio of at least two percentage points by March 2024, creating around £600 million of annualised additional capacity to invest in the customer offer and deliver improved financial returns. The money we save will enable us to reinvest in our food business to give our customers better products, improved service and lower prices
· This will require total cost savings significantly higher than £600 million given the need to additionally address inflationary cost pressures, volume-related cost increases and the cost of meeting increasing customer demand for online groceries. We have extensive plans in place to deliver these cost savings across the business. Some key examples are:
o Creating a new supply chain and logistics operating model, moving to a single integrated supply chain and logistics network across Sainsbury’s and Argos. This will structurally reduce our costs by £150 million by March 2024
o Moving 150 Argos standalone stores into Sainsbury’s and reducing the number of Argos standalone stores to 100 over the next three years will reduce our operating costs by £105 million by March 2024
o Reducing significantly our costs by further adapting our store operating model to better reflect customer demand and the way customers shop in our stores now and in the future. The closure of our meat, fish and delicatessen counters will save at least £60 million in operating costs and will reduce food waste and energy consumption in our stores
o Building on last year’s property strategy programme, where we said 10 to 15 supermarkets and 30 to 40 convenience stores would close over two years, we now expect that 15 to 20 supermarkets and 50 to 60 convenience stores will close over the next three years. We expect to open 100 convenience stores over the next three years
Strategy Update – Key Financials
· We expect an inflection in underlying profit momentum, driven by an improved food performance, improved financial services and general merchandise profits, lower interest costs and funding from the accelerated cost savings programmes outlined above
· Based on an expectation that the impact of COVID-19 on profits will be limited to the financial year to March 2021, we expect underlying pre-tax profits in the financial year to March 2022 to exceed those reported in the financial year to March 2020
· We expect to meet our target of reducing net debt by at least £750 million in the three years to March 2022 while maintaining a policy of paying a dividend covered 1.9x by underlying earnings and to generate average retail free cash flow of £500 million per year over the following three years
· Capital expenditure will increase to around £700-750 million per year in the three years to March 2024 to support high returning investments in the transformation of our logistics platform and accelerated restructuring of the Argos store estate, before returning to around £600 million per year
· The changes required to our physical infrastructure, store operating models and central structures will incur one-off costs of £900 million to £1 billion in the period to March 2024, of which around £300 million will be cash costs. We expect total non-underlying costs of around £625 million to be booked in the current financial year, of which around £100 million will be cash costs
Targets and metrics
We will better align internal and external metrics and targets and will report against these consistently. Key metrics will be:
· Customer Satisfaction
· Grocery market share
· Colleague engagement
· Movement in operating costs as a percentage of sales
· Underlying Profit Before Tax
· Retail Free Cash Flow
· Net Zero by 2040 in our own operations
Simon Roberts, Chief Executive of J Sainsbury plc said:
“As we go into lockdown in England for the second time this year and restrictions are in place across the UK, we know our customers and colleagues are feeling anxious and we will do all we can to support them. Our colleagues have done an exceptional job going above and beyond for our customers every day which is why we are giving our frontline colleagues a second 10 per cent thank you payment. Above all else today, I want to express my heartfelt thanks to every one of my colleagues in our stores, in our depots, and across our store support centres for all your hard work and for your outstanding team effort. We also want to support our communities and those in need and are creating a £5 million community fund for local charities and good causes, in addition to the £7 million we donated to Fareshare and Comic Relief earlier this year. We want to do our bit to ensure that no one goes hungry at Christmas and to support those most in need.
“COVID-19 has accelerated a number of shifts in our industry. Investments over recent years in digital and technology have laid the foundations for us to flex and adapt quickly as customers needed to shop differently. Around 19 per cent of our sales were digital this time last year and nearly 40 per cent of our sales are digital today.
“While we are working hard to help feed the nation through the pandemic, we have also spent time thinking about how we deliver for our customers and our shareholders over the longer term.
“We will put food back at the heart of Sainsbury’s. We are already working to make this happen – we have lowered prices on over 1,500 every day grocery products over the past few months and we will do more of this, focusing on the staple products that our customers buy every day. We know that customers are feeling the pinch and we want them to feel confident they will get always get great value, quality and service from Sainsbury’s. We will focus on accelerating product innovation and will bring new and exclusive products to our customers much more often. To support our ambition in food, we are accelerating our ambition to structurally reduce our cost base right across the business so we can invest faster back into our core food offer.
“Our other brands – Argos, Habitat, Tu, Nectar and Sainsbury’s Bank – must deliver for their customers and for our shareholders in their own right. Argos sales have been strong over the past six months and we have gained almost two million new customers as people have re-connected with Argos. Over the next three years we will make Argos a simpler, more efficient and more profitable business while still offering customers great convenience and value and improving availability. We will also make Habitat more widely available in Sainsbury’s and Argos, giving customers access to stylish home and furniture products at more affordable prices. We are talking to colleagues today about where the changes we are announcing in Argos standalone stores and food counters impact their roles. We will work really hard to find alternative roles for as many of these colleagues as possible and expect to be able to offer alternative roles for the majority of impacted colleagues.
“Given the unprecedented circumstances of this year and the challenges facing our colleagues, including the changes we are announcing today, I have informed the Board that if a bonus is payable, I will waive any bonus entitlement for this financial year.
“We are raising our ambitions. By delivering improvements in value and quality and simplifying this business, we will do a better job for our customers and deliver an improved financial performance and stronger shareholder returns.
“Right here and now I and all the team are focused on supporting and delivering for our customers in the days and weeks ahead.”
