Sainsbury's: Strategy Update With No Surprises but Lower Free Cash Flow Guidance

Sainsbury's outlined its "Next Level Sainsbury's" strategy in a recent update, ahead of the company's Capital Markets Day, emphasizing its commitment to medium-term growth through fiscal 2027. The plan includes generating over GBP 1.6 billion in retail free cash flow (versus GBP 1.9 billion in our model over the next three years to fiscal 2027), investing GBP 800 million-GBP 850 million annually in capital expenditures (versus GBP 730 million in our model), and saving GBP 1 billion in costs by incurring GBP 150 million in one-off cash costs. Additionally, the strategy aims for retail operating profit growth each year, food volume growth ahead of the market, higher customer satisfaction, colleague engagement, and a commitment to environmental and social goals. The company also plans to enhance fresh food choices in stores and expects significant grocery volume gains from this initiative. On a more positive note, the grocer announced its first share buyback program and a progressive dividend policy, with GBP 200 million earmarked for share buybacks in fiscal 2025. The focus on expanding the food range in 180 stores, reallocating space from general merchandise to food, and opening 75 new Sainsbury's Local convenience stores underscores Sainsbury's strategy to double-down on serving consumer needs and preferences better in an increasingly competitive U.K. grocery market. In addition, the transformation of Argos and a new direction for financial services, moving toward third-party provision, is a strategic shift for the group. The higher capital expenditure guidance, which will slightly impact our free cash flow estimates, is a negative surprise while the overall financial outlook remains unchanged. We don't expect to materially change our GBX 301 fair value estimate for Sainsbury's after accounting for slightly lower free cash flow estimates in the midterm due to the step-up in capital expenditures. Shares are fairly valued.