Analyst Note| Ioannis Pontikis, CFA |
J Sainsbury reported preliminary results (for the 52 weeks to March 6) of GBP 29 billion sales (versus GBP 28.5 billion in our model and GBP 29 billion for Visible Alpha consensus) with like-for-like sales growth (excluding fuel) up 8.1% (total retail sales excluding fuel up 7.3% versus Tesco's core U.K. segment of +7.7%). Fourth-quarter trends were particularly encouraging with like-for-like sales growth of 9.2%, driven by Argos and the general merchandise category (Argos was up 18.1% versus 1.8% in the first half). Grocery continued to benefit from increased food-at-home consumption trends growing 7.8% during the year (up 7.1% in the fourth quarter). Clothing sales rebounded 4.2% (0.4% in the third quarter and negative 18.3% in the first half) in the fourth quarter, with online sales particularly strong, growing 65% for the full year, partially offsetting an in-store decline of 16%. Online grocery continued to be the standout, with 120% sales growth, over 850,000 orders per week capacity, and 850% growth in click & collect orders in the year. Underlying profit before tax came lower at GBP 356 million, a function of significant retail COVID-19 costs of about GBP 485 million that places the firm at the high end of peers' range (COVID-19 costs as a % of retail sales). The grocer confirmed guidance for underlying profit before tax to be at least at the 2020 level (GBP 586 million) and expects profitability in financial services to turn positive in fiscal 2022, both in line with our estimates (GBP 595 million and GBP 13 million in our model, respectively). Given a better-than-expected net debt reduction this year, the firm updated its fiscal 2023 net debt reduction to GBP 950 million from GBP 750 million previously, though some of the benefit this year was driven by working capital inflows that are expected to reverse next year. We do not expect to materially change our fair value estimate after incorporating fiscal 2021 in our model. Shares trade in 3-star territory.