Sainsbury has announced a new three-year strategy. The group said it will offer more food options and consistent value for shoppers. Efforts to attract and retain customers will also include refining Sainsbury's loyalty scheme. Some space in stores will be reallocated to food, away from general merchandise and clothing.
The group plans to generate £1bn of cost savings over the three years and increase capital expenditure to £800 - £850mn a year. Free cash flow of "at least" £1.6bn is expected over the next three years.
Sainsbury also announced a £200mn share buyback, and a "progressive" dividend policy in the new financial year.
The shares fell 3.7% following the announcement.
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Our view
Sainsbury's new strategy has failed to enthuse investors. We suspect that's because it's a little bit fuzzy around the edges. But while we wait for more details to emerge, the fundamental ideas seem sensible to us.
Doubling down on food, value and product ranges is the right thing to do. As things stand, Sainsbury's is especially exposed to General Merchandise, with its ownership of Argos on top of in-house offerings. This type of revenue is even more difficult to capture when the economy is sluggish - dinner needs putting on the table no matter what, but new mugs, tablemats and toasters can wait.
In the core food business, Nectar prices and a big push on product improvement have helped Sainsbury's seize market share and we're pleased to see the group build on this momentum. Impressive uplifts in Taste the Difference demand suggests customers are also leaning towards treating themselves at home, which bodes well.
Grocers have been forced to up their game as competition in the industry reaches fever pitch thanks to the upwards march of Aldi and Lidl. And while Sainsbury's value-led strategy has paid off, offering value doesn't come cheap. Profits aren't shooting the lights out. Those in the middle of the market, like Sainsbury's, are most exposed in these tough times. It means the group has no choice but to get its hands dirty and fight for customers. That puts a firm ceiling on margins, and it's unclear when things will fire back up.
We're cautiously optimistic that the worst of this is unwinding, but mapping this trajectory perfectly is very difficult. The cost saving programme is helping to combat rising costs and progress has been good, and efforts have just been refreshed for another three years.
The balance sheet is in better condition, with the group hitting its four-year £950mn net debt reduction target a year ahead of schedule. Along with the £600mn+ of retail free cash flow last year, there's some significant weight behind the healthy prospective yield. Remember, no dividend is guaranteed, and there are changes coming in the new financial year.
We continue to be pleased with the direction of travel at Sainsbury's. Demand is holding up better than we feared. Grocery competition is fierce though, and the uncertain environment isn't currently reflected in the group's valuation in our view. Market sentiment will remain subdued until the new strategy has more clarity.
Sainsbury's key facts
All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.
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