Sainsbury’s has followed Tesco in warning that soaring inflation is likely to impact its performance in the year ahead, taking the shine off robust annual results.
Over the year to 5 March 2022, Sainsbury’s underlying pre-tax profit surged up 104% to £730m as it recovered from costs related to Covid. The group stated that the jump in profits reflected elevated grocery sales and lower finance charges, with “significant investment” in core grocery funded by cost savings, fuel and a more profitable general merchandise and clothing business.
Group turnover increased by 2.9% to £29.9bn, boosted by fuel sales. However, excluding fuel, retail like-for-like sales slipped 2.3% against an 8.1% rise the year before.
This partly reflected weaker grocery sales as the shift to consumption in-home seen during the height of the pandemic eased as the year progressed. Total grocery sales edged down 0.2% year-on-year but were still up 7.6% on the pre-Covid 2019/20 financial year.
Sales in its supermarkets fell by 2%, having soared 11.4% in the prior year. Online grocery sales fell by 4.7% as Covid restrictions eased, while convenience sales grew by 8.8% as demand in urban sites recovered.
Meanwhile, the group’s Argos operation recorded a fall of 12.5% and general merchandise sales in Sainsbury’s supermarket slipped 8.6%. The only bright spot in non-food was clothing which grew 12.7%.
Looking ahead, the group warned that underlying profit for its 2022/23 financial year was expected to fall to between £630m and £690m.
“The year ahead will be impacted by significant external pressures and uncertainties, including higher operating cost inflation and cost of living pressures impacting customers’ disposable incomes,” said Chief Executive Simon Roberts.
Already this month, Tesco, Morrisons and the Co-op have warned about the outlook as a cost of living crisis and supply disruption due to the war in Ukraine weighes on the grocery sector.
However, analysts see Sainsbury’s as more challenged than other supermarket groups because of its ownership of Argos, which is more exposed to pressure on consumers’ disposable income. The group’s annual results show that its overall general merchandise sales slumped 21.1% in the fourth quarter, having fallen 16% in the third.
Data released by Kantar this week showed food inflation hit 5.9% in April, its highest level since December 2011. Sainsbury’s said today that it had continued “to inflate behind competitors on the products customers buy most often,” and last week lowered prices across 150 of its highest volume fresh products.
On Monday, both Asda and Morrisons said they were cutting prices on essential items, pointing to a margin-damaging price war in the months ahead.
“Our job and what we are doing is to stem the tide of that [inflation] as much as we can… and keeping prices down,” Roberts said.
“We can see the early signs of customers being a bit more cautious, watching every penny, every pound.”
Roberts added that the supermarket’s own-label products were proving more popular with customers, but said it was too early to see if this was a long-term trend.
“We know just how much everyone is feeling the impact of inflation, which is why we are so determined to keep delivering the best value for customers,” he said.
Shares in Sainsbury’s fell nearly 4% in early trade, underperforming the wider market, and adding to a fall of 13% so far this year.
John Moore, senior investment manager at Brewin Dolphin, commented: “Broadly speaking, Sainsbury’s has posted a good set of results for the past 12 months, but all eyes are on the impact of inflation in the year ahead.
“The supermarket expects the higher cost of living to hit profits, and it will have a difficult balance to strike between helping customers, upping staff pay, and maintaining its commitment to shareholders.”
However, he noted that the group’s self-help measures taken in recent years on debt reduction and cost management have also strengthened its balance sheet.
NAM Implications:
- These profits will become a consumer issue when soaring inflation hits the shelves…
- Whilst suppliers will want credit for their input…
- Both Tesco and Sainsbury’s results will add further pressure on the two PE mults…
- Anticipate an escalation of ‘early signs of customers being a bit more cautious, watching every penny, every pound’.
