Sainsbury's profits top expectations as King steps down - UPDATE

7th May 2014 07:03

- PBT up 5.3 per cent, ahead of consensus- Capex reduced to 0.88bn pounds, same expected in 14/15- Bank plans to add costs- Kantar figures show grocery growth at 11-year low Sainsbury's Chief Executive Justin King delivered his last set of annual results, with profits growth ahead of expectations.Underlying profit before tax rose 5.3% to £798m, ahead of the consensus of £782m, on underlying group sales including fuel up 2.8% to £26.35bn. Earnings per share increased 6.5% year-on-year to 32.8p, and a final dividend of 12.3p makes a full year payout of 17.3p, up 3.6%.Retail operating profit before tax (PBT) increased by 5.1% to £873m as cost savings of around £120m in the year offset the impact of rising costs. Underlying retail margins improved eight basis points to 3.65%.In the new financial year the group expects cost inflation just over 2% and efficiency savings of around £120-£130m.King said: "While the general economic outlook is showing some signs of improvement, conditions in the food retail sector are likely to remain challenging for the foreseeable future as customers continue to spend cautiously. We remain committed to investing for the future and continue to see significant opportunities for growth."Investing in the store estate was lower, however, due to a reduction in the value of land purchases and expenditure on future new stores. Core retail capital expenditure decreased by £152m to £888m and Sainsbury's expects a similar level in the new financial year.The convenience store opening programme was stepped up in the year with 91 new convenience stores helping these smaller outlets overtake larger stores in January. This business grew at around 19%, well ahead of the market, and annual sales are now over £1.8bn. The online grocery business grew at over 12% and annual sales topped £1.0bn.Sainsbury's Bank contributed £24m to underlying PBT, compared to £22m the year before. In the coming year, plans to transition it to a stand-alone bank will limit profit growth due to double running cost, with a total of £260m in transition costs and capital expenditure moving to the new platform.Sainsbury's said it did not expect profit consensus to change as a result of announcements in its preliminary announcement.Broker Shore Capital said, while it may tweak forecasts post today's update, it does not anticipate significant changes to expectations of a broadly flat year.King will hand over to current Commercial Director Mike Coupe, dubbed 'Mr Straight' by some retail commentators, at the July AGM.Shore said Coupe was "an experienced 'super-marketer' in his own right". "We sense that investors, especially those with an interest in income, will be keenly interested in how the group's strategy and cash flow evolve, noting as we do the central expectation for much operational and strategic continuity in the near-term."Consensus has decreased significantly for Sainsbury's dividend and expectations are for a 3.5% cut next year. After an analyst conference call, Nicla Di Palma, analyst Brewin Dolphin, reported that management stated that "it has a dividend policy based on increasing the dividend year-on-year with a cover target of two times in the medium term".Di Palma expressed surprise at the fact that, despite the intensification of competitive activity, Sainsbury did not announce any investment in pricing. Instead, she said CEO Justin King stated that Sainsbury has reached an all-time-high market share, highlighted the differentiated offer, the revamp of the own-brand and the existing Brand Match offer, and stated that Sainsbury was "ready to react" if it sees any meaningful changes in like-for-like sales. "This will obviously take some time as there is a delay in sales reaction after a change in price," Di Palma said. Another analyst controversy was about capital expenditure, she reported, with Sainsbury guiding to a similar amount in 2014-15 and after that targeting capex of less than 3% of sales that would equate to £700-£800m. "Whilst this is less than in the past, we believe capex should be cut substantially more," the analyst said. "Also in this case, it is a matter of waiting and seeing whether the new CEO Michael Coupe will move away from this strategy once he officially takes over the helm in July. We believe opening more convenience stores makes sense, but opening large supermarkets does not."Shares in Sainsbury rose initially but were down 1.95% to 326.9p at 13:25 on Wednesday after the release of down beat industry data from Kantar Worldpanel.The data showed British grocery market growth was just 1.9% in the 12 weeks to April 27th - the lowest level for at least 11 years.OH