Sainsbury (J) PLC SBRY
Q1 2014 Earnings Call Transcript
Transcript Call Date 06/12/2013

Operator: Good morning, ladies and gentlemen, and welcome to the J. Sainsbury Analyst Call hosted by Justin King. My name is Sue and I'm your event manager. During the presentation, your lines will remain on listen-only. I would like to advise all parties that this conference is being recorded for replay purposes.

Now, I’d like to hand over to Justin. Thank you.

Justin King - CEO: Good morning, everyone. Thanks for coming on the line. I'm joined by Mike Coupe and John Rogers. As you all know, this is our first quarter trading statements for the 12 weeks finished last Saturday, the 8th of June.

As you will have seen, we delivered a solid sales performance to start the year in what remains a challenging market. Our total sales up 3.6%, or 3.3% excluding fuel, and our like-for-like sales up 0.7%, or 0.8% excluding fuel. A strong contribution there from new space as you'll see, and the underlying performance reflecting challenging comparatives, particularly of course, the Jubilee last year.

Our market share continues to grow. Latest market data showing it up 0.2% to 16.8%, and we remain the only one of the big five grocery retailers to be growing market share. Underpinning that performance is the great service and availability in our stores; you will have seen last night that the Grocer Awards, we won both the customer service and availability awards over the last year, a great testimony there to the fantastic job being done by our 156,000 colleagues.

Of particular note, in the quarter performance of our own label ranges by Sainsbury's, the relaunch now complete, up 7% and Taste the Difference up 10%, driving our own label penetration to a recent times high.

In a separate announcement today, we update on our 20x20 Sustainability Plans. I encourage you to read through that announcement to see the progress that we are making; a couple of highlights we have drawn attention to today. The joint investment we've made with our supplier Dunbia in Wales, securing around 600 rural jobs, but also supporting the Sainsbury's Lamb Development Group, primarily Welsh farmers, who provide almost all of our new season lamb.

We also reached an important milestone part of our Paralympic legacy, our 2,000 disabled colleague employed through our partnership with Remploy.

Looking at other legs of our growth strategy, a general merchandise, which continues to be focused on being complementary to our food offer, growing at twice the rate of food and particularly noting, homeware, with kitchen electricals up 34%, cookware up 23%, reflecting the fact that that offer being complementary to the weekly food shop showing market contrasting growth.

Convenience driven by a good underlying like-for-like, plus 19 new stores, up 20% year-on-year in the quarter, and online continuing to grow in the mid-teens just in excess of 16% in the quarter.

As I've already mentioned, 19 new convenience stores and 13 refurbished. Of course, our first convenience store celebrated its 15th birthday in the quarter, so some of our older stores requiring refurbishment and one new supermarket with six refurbished, bringing our total new space in the quarter to 82,000 square feet. You'll note reduced level of extensions now contributing just 0.2% to our growth figure.

As we look forward, we believe our continuing advantage is through helping our customers live well through less. The less through the use of our own brand ranges, Brand Match to reassure on price, the unique technology that is coupon-at-till combined with Nectar means we remain well positioned to continue to outperform the market in what we expect to remain challenging for our consumers.

With that I hand over to questions.

Transcript Call Date 06/12/2013

Operator: Edouard Aubin, Morgan Stanley.

Edouard Aubin - Morgan Stanley: Just one question from me regarding the private label growth, you mentioned the re-launch driving the good performance. Could you provide a little bit more color as to why you're so significantly outperforming the market, because a number of your competitors have also done relaunches recently, and what is the ceiling for you for private label side participation in your mix?

Justin King - CEO: Well, I'll ask Mike to talk a little about the data of the relaunch, but just to sort of nail the headlines, I mean, by Sainsbury's it's about 40% of our sales. So it's the main event where it comes to own label and they set up around 7%. Our overall own label penetration now at around 52%, that would be the highest, certainly in the last five or six years and probably about – we would measure that is about a 5% delta to the market – with the market of major grocers would be around 47%. Importantly, that's a couple of percent more than it would have been in the quarter last year. So it was around 50% in the same quarter last year. Worth making a point, by the way the own label penetration varies quarter-to-quarter because of the different seasonal purchasing. That 52%, that 2% increase, of course worth pointing out, would deflate our sales a little, because our own brand is significantly cheaper, around 20% to 30% cheaper than the equivalent brand. So it's a great way of putting money into our customers' pockets at no cost to the P&L. As far as the success of the launch, Mike?

Mike Coupe - Group Commercial Director: Yes, I mean, it's a slightly glib answer, but we would say that our products are better than our competitors. So in the end that's what drives our major point of difference and we've invested very, very heavily, particularly in by Sainsbury's over the last couple of years, but of course, we relaunched Taste the Difference in September of 2011. That has also helped to drive our business, so Taste the Difference has grown by roughly 10% compound for the last couple of years. It's now GBP1 billion branded and of its own right. So it's a significant business. We're seeing significant growth we're reporting today in by Sainsbury's as we go through the relaunch of that. It's underpinned by a marketing program, which makes sure that we follow it through the line. So the merchandising in our shops, the advertising you'd seen recently for by Sainsbury's, the quality of the products, it all followed through. So a good example of that's our fresh ready meal range, significant relaunch, big remerchandising, alignment of prices, investment in quality and all of that has come through in the sales growth. Of course, it's underpinned by our values. We make a big play of making sure that we reach right away through our supply chains. We know where the products come from, that we source the ingredients responsibly and sustainably and that works in the overall mix.

Operator: David McCarthy, Investec.

Dave McCarthy - Investec: Just a simple question. You've obviously produced the best like-for-likes amongst your competitors, but you all disadvantaged yourselves or you are disadvantaged because of the timing impact, because you've got the Jubilee comparison in there. To give us a feel for your relative outperformance, can you tell us what the run rate was maybe for the first 10 weeks of the period and just exclude that Jubilee weekend, because that would give us a more direct comparison with your competitors, just a feel would be helpful.

Justin King - CEO: We don't need us to do that fully, Dave. If you look at the Nielsen data, which came out last week, which is for the 12 weeks to the 25 May, which is the 12 weeks that Tesco reported last week and therefore, excludes the two weeks of Jubilee impact, you would see they pick us up just a little bit short of 2% like-for-like and whilst, of course, there are always slight ebbs and flows in Nielsen, we wouldn't (demur) significantly from that.

Operator: Clive Black, Shore Capital.

Clive Black - Shore Capital: Just one question for me, (you'd be happy to know). You talk about a challenging economic environment, Justin. But a lot of the secondary data on the U.K. economy over the last six to eight weeks has been more fundamentally positive than it has for some time. I just wondered to what extent you would be expecting to be more positive about the consumer in quarters ahead as opposed to where you are now. In particular, what you took from the consumer confidence data last month, which at its largest that would move for some time.

Justin King - CEO: I think it's a difficult balance to be struck here Clive, because what the data was actually showing is that people are less negative than they once were. I think it's – of course it's absolutely right and we did it in our interest to have a more upbeat backlog to the consumer environment. I think it's helpful that that is the commentary that we’re seeing in a lot of the news media. But I think we have to be realistic that still almost every measure of consumer sentiment remains negative, albeit less negative than it once was. That's a good thing, because clearly it's been resolutely downbeat for a long time. If you look at the realities of household budgets, there have been some easing in pressure in recent months. If you look at fuel, I can't remember the last time we reported a quarter sales where fuel was deflating the headline figure, because we actually saw fuel, I think, in average of about GBP0.04 a liter cheaper in the quarter than it was a year ago and it's been a long time since that was true. So there are some real reasons why people might have a little bit more money to spend. But in terms of behavior, we see the behavior over the last two or three years being very ingrained and that is that when there are special occasions, more recently, for example, the prospect – it didn't turn out to be a reality, but the prospect of a sunny weekend. We can see consumers have kept enough money by as it were to enjoy. But when there isn't a good reason to spend, they are being very circumspect with their expenditure. We think that dynamic will remain for good while yet. They'll need to feel a good bit more positive and feel when, they look at their bank accounts, a good bit – a more wealthy if you like, before they start splashing out to a lot more. But the direction of travel is helpful, I agree.

John Rogers - CFO: I think, Clive, one of the key drivers we've always looked at is, of course, consumer disposable income and that does seem to be quite well correlated with like-for-like performance in the market. If you look at most economic forecasts, they are not projecting a material uplift in disposable income in this current financial year. It may come through the following year, but the next 12 months looks broadly similar to the last 12 months.

Clive Black - Shore Capital: Just by way of a quick follow-up, if I may. Would you see any reason as to why supermarkets, big four or five supermarkets wouldn't capture an improvement in consumer confidence in expenditure, i.e., do you believe that that expenditure could actually go elsewhere as opposed to supermarkets?

Justin King - CEO: Well, (what's the line here), a rising tide raises all boats. That will definitely be true. In terms of going elsewhere, I think that there are two aspects to that question. One is that, clearly, if people have a little bit more money to spend, when the celebratory times comes along, I think that's when they will spend it. So if you were looking at the Christmas quarter, for example, it makes you more optimistic about what people would spend in the last two or three weeks before Christmas, not more optimistic necessarily about the whole of the quarter. But there is no doubt that non-food is more geared to disposable income, but that's why we make a point again in our statement that notwithstanding the pretty downbeat noises from non-food retailers and some of our competitors about their non-food business, our non-food business remains very strong. If there is to be an uptick in expenditure in that area, we think we've positioned our non-food business very well to capture that.

Mike Coupe - Group Commercial Director: Clive, it's just worth reinforcing John's point. If you look at the trends over the last couple of decades, there is a direct correlation between disposable household income and market growth overall. Now, as you guys often say, the past performance is not necessary an indication of future performance, but if household disposable income increases, then as night follows day, the chances are that the growth of the market will increase.

Operator: Andrew Kasoulis, Credit Suisse.

Andrew Kasoulis - Credit Suisse: Just to square the sale circle a little bit. What was your branded grocery sales growth? I'm guessing it was all flat, small negative, and if there is any color on that, please? What was the inflation for the quarter?

John Rogers - CFO: Well, Andrew you're broadly right. I mean our branded grocery roughly flat to make the numbers add up. So that's correct; and on inflation, we saw inflation come off a little bit, so about 2.5% in the quarter.

Andrew Kasoulis - Credit Suisse: Any color on branded grocery? Was it just the outperformance of own label? Or was there something specific to branded grocery that led it to lack a bit?

Justin King - CEO: Well, I think if you've been watching us week-to-week, you'll see once we completed the re-launch by Sainsbury's, we did a very major promotion in-store. It was big cycle for us. As Mike talked about, it was a through the line execution from TV, direct mail activity, and then in-store execution. So to some extent, if you did big promotion in a 12-week cycle, you're going to have that effect. It does make us, if you look at the market data, somewhat less promotional in the quarter than has historically been the case, and a good bit less actually than the average in the market in the quarter, because obviously owned brand tends to be less promotional and slightly more, well, EDLP is an overstatement of the case, but slightly more EDLP.

Operator: John Kershaw, Exane BNP Paribas.

John Kershaw - Exane BNP Paribas: Two related questions from me. Just – I think you mentioned promotional intensity coming down. Clearly, we've seen quite a lot of, let's say, on targeted activities from the likes of Tesco with GBP5 off GBP40. So two related on this, one, what's your sort of giveaway from coupon-at-till done in terms of perhaps more targeted promotions in terms of uptick or downtick year-on-year? Secondly, noticed sort of in terms of online, what is your game plan there, because seeing a plethora of GBP15 off GBP60 spend, which is clearly a big discount and untargeted discount? So perhaps talk around those two.

Justin King - CEO: I think there is very little color we're going to be able to add on coupon-at-till. As you'll know, we've always reported our sales performance both in our quarterly trading statements and prelims and interims IFRIC compliant. For the very simple reason that we think the ebbs and flows of what we are spending on coupons are commercially and competitively confidential. So we report as it were cash in till, and therefore don’t reveal and won't reveal effectively our marketing investment. But what we can say is that as we learn over time, we think we get better at spending that money. We understand what motivates customers. We have an underpinning objective, which is that the more customers use the vouchers we give them, the better the vouchers must be. We don't subscribe to the view of some that somehow printing lots of vouchers that don’t get used is a good idea. We like customers to use the vouchers; it means we've given them vouchers that they want and that change their behavior. So we are very comfortable with our developing understanding there and with the level of investment that we're making. Of course, more widely we've – and long since annualized on Brand Match. So that doesn't represent a material incremental investment as it did, of course, through most of calendar 2012. As far as online is concerned, well, again, it's much the same thing. I think we much better understand now the value of a newly acquired online customer, someone that's shopping in-store that we believe from their shopping patterns that they are probably online shopping elsewhere, or indeed we understand quite clearly when people tend to start online shopping. I won't give away much, but you will be surprised to know that a baby entering the family is a key trigger for online shopping. Of course, we can see when a baby has arrived and we can encourage and reward customers for moving their shopping online with us at that time. So, again, I think we would describe the level of activity on online at the moment as been very high and we are participating in that. But we would argue that we are more targeted than anybody in where we are spending that money.

Justin King - CEO: I mean, John, just to follow-up. I mean, the key point is over the last three or four years, the balance between sort of headline untargeted stuff in our business compared with the more effective targeted stuff has changed pretty significantly. So, for instance, our weight to press advertising is roughly half what it would have been, say, three or four years ago, and that money is recycled into more targeted marketing. Of course, as we learn about that targeted marketing, we get better and better at it. It becomes more efficient, it becomes a much better way of spending the money, and that's particularly reinforced in online, where I would argue that we don't have to be quite as rude one in our approach as some of our competitors. We are able to pick the right customers, the customers who are more likely to change their behavior towards an online offer.

John Kershaw - Exane BNP Paribas: Okay, it just looked pretty untargeted on the online in contrast to the other stuff, but perhaps you could tell us…?

Justin King - CEO: We’ve been sending you lots of vouchers then, because I can get you switched off.

John Kershaw - Exane BNP Paribas: There is a pass through of GBP15 off GBP60, basically in the till receipts by the bins in-store, because we thought you might be targeting them, but they clearly were generic…

Justin King - CEO: Well, of course, this is a direction of travel. We also always make sure that we are competing headline level with all of our major competition, as you can imagine. I think that it's important point though, because the key to success is that consumers are shopping in multiple channels for their groceries. We showed you this chart back, I think, the first time at our Interims last year that showed you that the sort of two plus two equals a number bigger than four effect, particularly between supermarkets and online. It's less dramatic when it overlaps with convenience, but it still works. If you can identify in-store shoppers, who are either likely prospects to be shopping online or likely to already be shopping online elsewhere, there is a huge benefit to the business of locking in their online shopping, too. It ultimately gets them to spend more money in the grocery store as well. So, you will absolutely see in retailers with data who have stores and online operations more, not less, of that activity.

Operator: James Anstead, Barclays Capital.

James Anstead - Barclays Capital: Just one question left from me, it's about your non-food. I know your offer is designed to be complementary, and you're clearly much lesser exposed to big ticket electrical items. But I wonder, nevertheless, are you taking active look at whether you might want to change the non-food space allocation at the margin or you'd think that's just really a nonissue for you?

Justin King - CEO: What if you guys (are off) King's Lynn store, you get some sort of flavor of the future and that's basically changed the balance of space towards more home products – home textiles, home electricals, kitchen utensils those kind of categories; pay for shop, so cards, wrap, higher margin categories and it's playing a little bit of a balance between that and high ticket electricals and of course entertainment, which is the other sort of big space item. Our view of entertainment is that, we'll be selling physical products for (deeply) many years yet, but clearly in a market which is in not insignificant decline, rebalancing the space is very important part of the overall portfolio. But you can get a flavor of where we're taking the offer as I say in our latest milestone stores, which are King's Lynn and Weedon Road and that will give you a good idea of what we're thinking about for our future.

Justin King - CEO: If you look at the electrical, stationery and leisure category overall, it's actually one of our fastest-growing non-food categories. Within that, as you rightly highlighted, big ticket electricals is down slightly year-on-year and that's to be expected, so the mix is changing. But, overall, the across the board, that's one of our fastest-growing areas.

Mike Coupe - Group Commercial Director: Well, of course, the industry is annualizing the combination of the European Football Championships last year and of course, the Olympics, so there are probably going to be some quite tough comparatives for the market in general.

James Anstead - Barclays Capital: Just quickly a follow-up on that. If King's Lynn is kind of where your thoughts currently are, does that mean you'll be going back to most of your existing stores and making changes or is this really very much a gradual evolution?

Mike Coupe - Group Commercial Director: You have to wait and see. But self-evidently, if it's working, we balance, they sort of roll forward into new extensions and new stores with a roll back into existing shops. But it's fair to say that King's Lynn has worked out pretty well and we're pretty pleased with the results; so watch this space.

Operator: Sreedhar Mahamkali, Macquarie.

Sreedhar Mahamkali - Macquarie: Couple of short questions from me, please. Just picking up there on non-food, you were able to just give us an idea how big electrical is as part of the non-food mix, and then if you could give an idea of overall non-food like-for-like in the quarter? Secondly, if you can just talk a little bit about convenience, that looks like 20% is faster than what we've seen throughout last year and not widely different, but a little bit faster. Is there any change in underlying like-for-like dynamic given I think the store opening right seems to be about 19, 20 stores a quarter?

Justin King - CEO: Yeah, I mean I don't think we would – we're going to breakout sort of individual categories. We don't in the food business, and I don't think we'll do that in non-food either. What I would just add to the previous commentary is that, I mean Mike made the point about last year and the European Football Championship and Olympics, which of course provided a kind a reason to chasing flat screen TVs in a big ticket electricals. The reality is that one of the quickest and the easiest way is to put top line sales into a grocery business is to sell a lot of flat screen TVs at 300 quid and no profit. We've not done that in the past. We don't have those comparatives, therefore, to bump up against. We will continue to sell big ticket electrical items. We still sell a lot of them. We selling them at fair and competitive prices on a consistent basis, and flat screen TV is just like the rest of our non-food offer (can) and are complementary to a weekly grocery shop. But it's fair to say that's a category that has being used in the past by some to chase short-term sales. I'd make a sort of a wider point to Mike's answer about King's Lynn, I guess there is an implied question in those that have asked about macro space. In other words, have we in total got much – too much space to non-food and we believe the answer to Sainsbury's to that is resolutely no. We've never opened stores, you know very biggest stores of which there is more handful are dominated by food. We've have opened stores dominated by non-food. We do not believe we have any major macro space issue to address. You are seeing King's Lynn, it's still a store when you leave it that you think you've been to a fantastic food store, first and foremost. As far as convenience is concerned, strong quarter, good step-up in the underlying like-for-like. We are seeing more lifecycle growth in convenience stores than perhaps historically we thought was likely. I think we've said at several times that we expect convenience stores to mature within a couple of years and find their level whereas a supermarket can take three, four or five years. Actually, we're seeing convenience stores having year two and year three underlying maturity in them, reflecting the change in shopping behavior. People topping out and it's one of the reasons you're seeing us go back to parts of town where you might have thought we were done and dropping another convenience store halfway between the two that already exist, because it's such a strong trend. It's giving us the opportunity to put them closer together; and they have nice lifecycle growth. Anything you want to add, John?

John Rogers - CFO: No, I think you covered it all. As Justin said, really strong like-for-like in convenience in the quarter; without giving too much away, this is sort of around the 3% to 4% level. So, a strong reflection of good growth in that sector.

Sreedhar Mahamkali - Macquarie: So non-food like-for-like, you are able to give a number there or no?

Justin King - CEO: Twice food.

Sreedhar Mahamkali - Macquarie: The overall sales growth, right?

John Rogers - CFO: The overall sales growth is more than double that of food in terms of the like-for-like, again, if you include the benefit of extensions, you’d be around this sort of the 4% to 5% level; if you strip out the extension piece, a pure underlying core non-food like-for-like around 2% to 3%. So good performance across the board.

Operator: James Tracey, Redburn.

James Tracey - Redburn: Just looking through your Annual Report that you published recently, it looks as though your true gross margin increased by around 70 basis points last year. I was wondering to what extent that was due to non-food mix and possibly increased private label penetration and where you see it going in this year and future years.

Justin King - CEO: I think the analysis that you are probably referring to James is the cost of inventory number. I think I would argue, that's not really a true underlying reflection of gross margin. It doesn't reflect of course, all of our investment to direct marketing, Brand Match, et cetera, et cetera. So I think to look at that number and assume it’s a (indiscernible) for the gross margin I think is misleading.

James Tracey - Redburn: So where you would see your underlying gross margin then, including all that other stuff?

Justin King - CEO: Well, as you know, it's not something that we would have a comment on, James.

Operator: Thank you. There are no further questions waiting.

Justin King - CEO: Okay. Well, thank you everyone for coming on the line. We're not going to be talking to you now for little while, the quarter two, our long quarter. So enjoy your summer break if you have one planned and we’ll be speaking to you in October.

Operator: Thank you. Ladies and gentlemen, that concludes your conference call for today. You may now disconnect. Thank you for joining, and have a very good day.