J Sainsbury plc (SBRY) Earnings Call Transcript & Summary

Hello, and welcome to the Sainsbury's Q3 Trading Statement 2022/2023 Analyst Q&A Call. On this call this morning is Simon Roberts, Chief Executive Officer; and Kevin O'Byrne, Chief Financial Officer. I will now hand over to CEO, Simon Roberts, for the presentation.

Well, thank you. Good morning, and Happy New Year, everyone, and thank you for joining us for our Quarter 3 Trading Statement covering the period up until the 7th of January. I'm going to talk through our trading performance in the quarter, and then Kevin and I will both, of course, answer as many of your questions as we can. Now the webcast will show the slides I'm going to talk to in the first part of the presentation over the next few minutes. We've also sent them around by e-mail this morning, and of course, they're available on our website, too. Okay. So to begin. And I want to start with a huge thank you, actually, to all of my colleagues right across the business who worked really hard to deliver the performance across the quarter that we've announced this morning and particularly during what was a huge week of Christmas trade. And it's really important to us that we've been able to recognize this and reward our Sainsbury's and Argos colleagues with the market-leading pay rise that we announced last week. We're really clear about taking care of our people. Taking care of our colleagues is really an investment in our business, it's not a cost, and it's really at the very center of helping make sure we deliver a leading customer service. Now talking about how we set out to deliver the best possible Christmas for our customer best Christmas -- heading into this Christmas, we knew that our customers we're really feeling the pinch, and they wanted to have, of course, the best Christmas possible while spending carefully. And I think we did a great job across our business, helping our customers to achieve this balance. We developed strong momentum over the year, delivering value and innovation, and our own brand sales of over 10% came through during the peak trading period. And of course, we really challenged ourselves to step up an extra gear for this Christmas, leading the market with deals like our GBP 4 per person fresh food Christmas roast dinner. And our customers really shopped into this, they really responded well. We also invested in service and availability to make sure that we could show up really well for our customers, particularly over that long Christmas week. And we knew that customers wanted to really get back to going all out for their big Christmas dinner with everyone back at home this year and celebrating together. And we were well prepared for this. We planned for it, we set everything up to be really ready to deliver for our customers. And we're also really focused on making sure customers could treat themselves and over half of our products this Christmas that were new were in Taste the Difference as that treating and celebrating more at home really came through. More and more customers also came back into our stores over the quarter 2, and August really came into its own in this regard with strong availability on the fastest-selling products that we saw such, as air fryers, cloth dryers, tablets and mobiles. And of course, customers really relied on the Fast Track Delivery and Click & Collect at a time when they couldn't rely on the postal network. So as a result of all of these things, walk-in sales in Argos stores and Sainsbury's were 50% higher on the year in the Christmas week. And really important to say here, too, that actually what we saw in that Christmas week was a big level of sales than we had in Black Friday for August. And that was on top of what was already a really strong Black Friday performance. So in short, we showed up, we think, really well for our customers this Christmas, and we were awarded with share gains in Food and in General Merchandise. And just to be really clear, this is no coincidence. We've been executing very consistently on our strategy for more than 2 years now. We've been driving costs out of our business, and we've been investing those savings in value, in innovation and in service. And so this Christmas, it was really about our strategy meeting delivery of a really strong operation. And you'll have seen today that we're expecting to deliver profits towards the upper end of our guidance range of GBP 630 million to GBP 690 million. And we additionally expect to generate retail free cash flow of around GBP 600 million. This is ahead of our previous guidance of at least GBP 500 million despite the cost of bringing forward the Colleague Wage Award and continuing to invest elsewhere in our customer proposition. So in summary, we believe we're delivering for our customers, we're delivering for our colleagues and, very importantly, we're delivering for our shareholders, too. So let's now turn to the performance and to the financials and look, first of all, at our quarter 3 and Christmas retail sales growth. So this chart shows the sales growth over the 16 weeks of quarter 3 in the gray bars, but also the shorter 6-week Christmas period in the orange bars. And as we can see, in all cases, growth was stronger over the Christmas period. In Grocery, this reflected better volume and mix trends as customers traded up for Christmas with a growth of around 7% in the 6-week period and 10% in the 4 weeks running into Christmas. General Merchandise sales growth continued to reflect the improved product availability, particularly compared to last year, of course, when it was challenging. And that came through across on consumer electronics items, and also in the speed and certainty of Fast Track Delivery and Click & Collect, which importantly was available in over 1,000 locations. Meanwhile, Clothing benefited from the higher footfall in our stores too, and particularly from that colder weather snap in the run into Christmas with knitwear and loungewear sales notably strong. So let's now turn and look at our performance compared to the market. And in terms of our Grocery performance, you all know and you've heard me say a number of times, that we believe that the most meaningful measure of our performance versus the industry is our volume market share. Now we stepped up our game for sure this Christmas with really bold ambitions, and that's reflected in the performance that we've achieved. We outperformed the market for the third consecutive Christmas. We outperformed all of our full choice competitors despite some pretty weak comparatives elsewhere. And over the longer period, with this data as much of our quarter -- with this data covering as much of our quarter as possible, we outperformed most of our full choice grocery competitors and again outperformed the market again. And the consistency of our outperformance also comes through in this third chart, which shows our volume growth versus the market compared to prepandemic levels. Now we think that customers are trusting us more than ever for our value. And we've made further significant improvements in our value position compared to all of our key competitors. You all know, you've heard me say a number of times that our value investment has been focused very much on the key fresh food items at the center of the plate. And that's been reflected in the market share gains we've achieved in Meat, in Fish and Poultry and in Fruit and Vegetables. We've also stepped up our Aldi Price Match proposition, still very much focused on fresh products, but also now bringing in some really important household items like nappies, cereals and canned soups. And we've just launched our biggest ever Aldi Price Match to start for the new year. Now on this next chart, we look here at the consistency of what we're doing on price. And it really comes through, I think, on this chart. We've shown you this before, and clearly, we've updated it to reflect the last period. But what you can see is consistently month in, month out, we're inflating behind our key competitors on the products that matter most to our customers. We're really focused on the items that customers buy most often hence, the importance of this Top 100 measure. But the trend is also the same across a full basket. And the key point here, of course, is that customers don't just make their choices on where they do their Christmas shop based on where everyone lands their price position into the last couple of weeks to Christmas. We've been delivering great value consistently week after week, and so customers trusted us to deliver great value for their big Christmas shop. Really important to an absolutely key to our strategy is innovation, providing opportunities for customers to trade up. And we've built the team and the capabilities to really drive a strong innovation performance in our business now. And the results of that, I think, really came through this Christmas. Of course, the key at Christmas is that customers are looking to treat themselves and their families. And we put over 300 new Christmas products into our range for this Christmas, and almost half of those products were in Taste the Difference. That was more than ever before. As a result, we grew Taste the Difference sales by 10% in the period into Christmas, and this was a key driver, we believe, of our market outperformance. Also important to say that Taste the Difference sales over Christmas were 27% higher than pre-pandemic levels, showing just how strongly we're now growing this brand. So when you put together the progress both on trade up and on value, you can see the results demonstrated, I think, in these charts, which we showed at the interims and again we've updated now. They continue to show our relative resilience as customers adjust their shopping habits. We're losing less to the limited choice supermarkets than our competitors. Our customers are dropping fewer items out of their basket and we're seeing less impact from trading down. And that's reflecting a more resilient customer base and more offset from customers trading up as well as trading down. And we're delighted that the investment we'll be making in service and in our colleagues continue to be recognized by our customers. Now I think it's well understood that the price inflation in the market is clearly putting customer satisfaction metrics under pressure across all the supermarkets. But we've grown our lead versus our full choice competitors, leading on the key areas that really matter to customers as we can see here, like speed of checkout and availability of colleagues. So having looked at Food First, let's now turn to our General Merchandise performance and look at what's been happening there. So the chart on the left here shows the detail behind the Argos sales performance with consumer electronics and technology, the key drivers is availability of tablets and phones stepped up significantly year-on-year. But on the -- as the chart on the right shows, we've also gained share in these categories given a strong reputation for value and an ability to offer key products faster and more conveniently than our competitors. I also want to call out our suppliers who've really supported us with more stock than our competitors in some of the most sought-after energy-saving items like air fryers and heated blankets. And we also gained share in TVs in the run-up to the World Cup. Customer satisfaction at Argos has been consistently running ahead of last year, and the benefit of improved availability came through here clearly too. Now this isn't just systemic availability. We've worked hard to capitalize on our scale. And we're getting, as I said, really good supplier support compared to some of our more structurally challenged competitors. And as we build our local fulfillment center network, we're starting to have more of the right stock available to customers faster, and we're better at showing this now to our customers. There's more to go for here as this network develops further. And so to summarize, we're really pleased with our performance over this Christmas and for the quarter. But I think more than that, we're pleased that we're maintaining strong momentum, delivering for our customers and executing at pace on the strategy we laid out in November 2020. We're in a stronger financial position with continued delivery of those cost savings that are underpinning our investment in value, in innovation, in service and in availability. And this means that we can invest and live for customers and colleagues while also delivering for our shareholders. Now as I said earlier, we're updating our profit and cash flow guidance for this year. Of course, it's too early to provide financial guidance for next year. But as we said at the interims, there is good momentum in our business, and we remain confident in our strong competitive positioning. So with that, thanks for listening to those opening comments. And let's now open the call up with Kevin, and we'll take your questions. Thank you.

[Operator Instructions] The first question is from Andrew Gwynn from Exane.

First question, how much of the -- sorry, I'm merging from the data that's here. How much of the performance you think you can extrapolate into the next financial year? I suppose better than seems to be the main takeaway from Christmas. So at what point do you start making maybe more constructive comments on the consumer? And then tied to that, obviously, guiding towards the upper end of the guidance range for this year, how much of that should we extrapolate into next year, mindful, of course, that you don't want to guide to precisely?

Andrew, thank you. Good to hear from you. Thanks for your question. And look, you're going to absolutely know what I'm going to say, which is we're not going to talk about next year's guidance there. And I know you'll understand the reasons for that. But just to try and put some context around that, look, I would say there's nothing more to say really than we said at the interim. We've got good momentum in the business, first of all, and you can see that's carried through the quarter, both on Clothing and on General Merchandise, underpinned by the strength of our cost saving plan. And we believe we continue to be in a strong relative position compared to our competitors given those actions that we're taking. And look, of course, there's obviously inflation pressures as we talked at the interims. But as I said before, we've got good visibility of those choices that we're making. You've seen what we've done on colleague pay, and we've talked about the energy situation before. So as we look ahead, it's exactly as we talked at the interims, and obviously, we'll talk more at the end of the year. I would just -- to the second part of your question, of course, look, we've seen consumer demand come through at Christmas. Customers have balanced their spend choices really carefully. And I think if we were to characterize how the consumer approached this Christmas, they spent carefully. They really look for where the deals and the value were in the market, and they look to make their budget stretch as far as possible. And we saw that play out for us in the fact that customers came all in, for example, for the big Christmas dinner again. We saw millions of customers buy into that. But we also saw customers trade up as well as they wanted to treat themselves and their families. And so as we come into the new year, as you'd expect me to say, value is going to be front end center. That's why we've put our biggest value plan out ever to start the new year with around 300 products in our price match. It's the reason why we're doing everything we're doing to make sure we support our colleagues and our customers, given the cost of living challenges. And of course, we'd be cautious about the consumer outlook for the year ahead. But we're focused on making sure we do the best job we can to keep the momentum going.

Okay. That's all very clear. I mean, do you think the consumer is healthier than maybe we do or maybe the press headlines suggest? Is that -- could we take that away from Christmas?

I think, look, I mean, the inflation numbers in the market aren't what customers are actually spending. We all know that. At the end of the day, customers are making choices about how they make their budget go further. So the double-digit plus inflation numbers that are out there, 13%, 14%, isn't how behavior in the end transpires to the actual spend at the end of the checkout. Customers are buying much more into private label. And we saw sales of our own brands go up 10% in the quarter. And I think that reflects the fact that customers are very savvy, right? They've worked out, they can get great Sainsbury's Quality at substantially lower prices by buying into own brands. They bought more in frozen food products on the way into Christmas, they're managing waste just to make sure that they shop frequently and don't waste any products. So I think they're just being really savvy, making that budget go further. And against those double-digit inflation numbers in the market, we're comfortably below that. We're inflating behind the market, as you can see. And so I think it's just making sure we continue to deliver the best value we can. We're consistent about that. And that consistency point is when I really want to stretch this morning. You can't move your price position up and down month-to-month. You've got to be consistently month in, month out building that trust. Customers are then shopping more with us. You've seen our volume performance as a result. And that's the approach we'll take. So customers are more savvy, we'll give them strong value, and we should be cautious about the outlook.

Our next question is from Izabel Dobreva from Morgan Stanley.

Happy New Year. The first one is on the General Merchandise performance. If I look at how the print came in, it was probably slightly better than what you have guided us to in the past. And I was wondering, could you give some color on which component surprised you positively? Was it the volume? Was it the price? And also, how is that gross margin mix trending sequentially as it looked like there was a bit of outperformance in the higher ticket categories? So that's my first question. And then the second one is just on the Food business. How should we think about the pace of your price investments over the next 12 months? Because on the one hand, the pricing position has been meaningfully reconfigured. But then on the other hand, we have seen a step up the Aldi Price Match and the price investments over the last quarter?

Izabel, thank you. Well, why don't I pick up how customers behave in General Merchandise and Argos and how we delivered. And then maybe Kevin can talk about what we think that means in terms of how the mix effects play through, and then I'll pick up on price investment. Look, I think the first thing to say is we're really pleased with the performance in Argos and General Merchandise this Christmas. We really delivered for customers first and foremost. And we saw customers really buy into the strength of our availability, the strength of our offer in terms of value and really importantly, as I mentioned in my opening comments, how convenient, particularly Argos now is. When you want to be absolutely sure, you can get the products you need in time for Christmas. And I think that really played through this Christmas. Of course, availability was much better than last year. This time last year, we were talking about major challenges in global supply chains. And this year, we were just in a much, much better place. And as I called out, we had really fantastic support from our suppliers, which meant on all the products that people really wanted to buy this Christmas, both energy-saving devices, TV is on the way in to World Cup and then Christmas gifts, we could really deliver in terms of availability. So there's a lot of self-help we put in place to make sure that we could really deliver the performance. And I think there was a couple of other things that helped. Customers were looking for ways of saving energy. And so buying an air fryer, buying a clothes dryer, buying electric blanket or products we had in lots of depth of stock and we could really fulfill against. Secondly, of course, we had the World Cup. We have another World Cup just before Christmas before, and that was an opportunity, obviously, to really make sure we were set for that. And of course, real challenge on spending, but we did pick up market share on the way into the World Cup in areas like TVs. And then, of course, we had a national postal strike, which meant you couldn't get things across the U.K. Argos already came into its own in that Christmas last kind of week, 10 days. And as I said, for Argos to have achieved more sales in the Christmas week within the Black Friday week was quite something, and I think just showed the extent to which customers really trusted Argos when they really needed it for Christmas. So we talk about category performance and mix, Kevin?

Yes. Just building on what Simon said there, Izabel, clearly, with very strong performance, things like small domestic appliances, which is a reasonable margin category. But the strongest performance in the larger categories, consumer electronics and technology performed very well, whether it's mobiles, mobile technology, wearables, et cetera. And that is a lower margin category, and hence there's a bit of a mix issue there, but more margin, but mixing into slightly lower margin categories. But overall, a really good performance, as Simon said. And people really -- the interesting thing was we saw a lot more people coming in and picking up in store than having home delivery, which again is good for our economics, but just shows the importance of the model and the fact that you can pick up your products in a 1,000 -- over 1,000 locations, really, really important this time of the year.

And then your last question on pace of price investment, Izabel, into our fresh food, onto our Food business as part of Food First. Let's just remind ourselves what we've done. So we said in November 2020, we had to become much more competitive. And we would really focus on our value investment in the center of the plate, in meat, in fish, in poultry, in fruit and vegetables and in dairy. And the reason that's so important is because if customers trust us in those key products they buy most often, they'll then shut the rest of the store with us. And that's exactly what's happened. That's the reason why our volume performance has really stepped on for the third consecutive year. And when we think about our value investment, our original guidance was we would invest around GBP 500 million in improving our competitors over 2 years. As a result of our performance this year, we invested a further GBP 50 million in November of this year. So the total investment is GBP 550 million over 2 years to the March at the end of this year. And this was all about getting us to a level of just being much better value. And you can see on the chart I showed about our consistently inflating behind our competitors just how much that's working for us now. And look, I think what I would say on this is 2 things. First of all, we want to be the cheapest in the market. We want to make sure we give customers value where it really matters. And so we think we've done a lot to get to that position. And now it's about sustaining it. And so that's where our cost saving program is so important because this is providing the fuel to enable us to continue to be competitive. As I said a number of times before, save to invest is an absolute fundamental part of our strategy. We've raised our ambition to take significant cost and complexity out of our business. We're reinvesting that and being better value. And of course, we'll continue to do that, but it's about sustaining now a much stronger competitive position that we've created.

So can we mostly read that it will be less than the past run rates we have seen?

Well, I think, look, without repeating myself, sustaining what we've now got to is important. And the last thing I would say is look, there's a lot of inflation challenges in the market. We believe this market will continue to behave rationally. There's labor inflation, there's energy challenges to face. And so holding our relative value position is what's going to be important to us, and that's what we'll continue to do.

[Operator Instructions] Our next question is from James Anstead from Barclays.

Happy New Year, Simon and Kevin. Going back to Andrew's question, and sorry if I missed this in your answer. But can you give us a sense of whether consumer trends changed after 25th of December? I mean, it sounds like you're setting yourself up for consumers tightening their belts. But were you seeing that happening already by the end of this period? That would be the first question. Then for Kevin, I was wondering if you can just explain why your interest cost expectations have come down helpfully. And you've also raised the free cash flow in from over GBP 500 million to around GBP 600 million. What's the delta there between what you're expecting now and what you were expecting back in November?

James, thank you. Okay. Well, look, I think first point I would make, clearly, we're on the 11th of January. It's still very early in the fourth quarter to see how customer shopping patterns are going to bed down. I think for the obvious reasons, people are just assessing where their Christmas bills are at. So it's really too early to say if we've seen any change one way or another post-Christmas. What I would point to is the momentum we brought into the new year. And as I've said, and forgive me for repeating here, but this momentum on consistently inflating behind the market is really important to us, 1% to 2% behind the market is what we've consistently done as you've seen, those cost savings, enabling us to do that. And look, at this time of year, everyone is even more focused, aren't they, on what the cost of their shopping is. And so that's why we put in place our biggest ever value campaign focused on Price Match, focused on fresh food, focused on covered essentials. And we're pleased with the start that's made. That being said, I think in terms of why the consumer spending, it's going to be the next 4 or 6 weeks before we see how the quarter beds down. And I think we should expect customers to be cautious for the obvious reasons, and the reality of higher interest, payments on mortgages, we'll be feeling very start for millions of households at the moment, paying for Christmas. Inflation is barely with us for a while yet. So our positioning is all about being our most competitive making sure we give customers real reasons to trust our offer and making sure that we keep pushing the delivery of our cost-saving plans and the way we've set out, I hope, really clearly with you so we can underpin in acquisition. So whatever plays out over the coming weeks and months, we're well prepared for it.

James, on the interest, there's a couple of factors at play there. One is we've got more cash on deposit, and we're actually getting interest on the cash and deposit, which is great. In fact, if you look at year-on-year, that's the biggest factor because of the change in the interest environment and our strong cash position. The second factor is fees. We forecast higher fees for renegotiating our a revolving credit facility. Now we've gone from having a facility of GBP 1.5 billion, we renegotiated and signed off just before Christmas to GBP 1 billion. So it's a smaller facility -- it's undrawn, by the way, it's just obviously an insurance policy, undrawn but fees were lower on that. And then there's probably an element of prudent forecasting, which we probably need to improve at this. Just on the cash flow, the GBP 500 million to GBP 600 million, 3 factors in there. CapEx, we guided to sort of GBP 700 million, GBP 750 million. We'll spend a bit less CapEx this year. That might see a little bit more next year. We'll have to see just on the timing of that. But CapEx is an element of it. Performance, the profit feeding through to cash. It comes straight through to cash and then there'll be some working capital at the year-end. So it's those 3 elements.

Our next question is from Xavier Le Mené from Bank of America.

Happy New Year. One question actually for me. Just we understand your relative performance and the fact that you have been doing better versus your peers. But in absolute terms, the fact that your volumes are negative. So how to see that going forward? I know it's offset by inflation. Net-net, you've got a positive sales growth. But I just want to understand what is the risk of volumes having a negative operating impact going forward? And what are your expectation potentially for next year? And linked to that, can you potentially comment the kind of exit rate in terms of volumes trading down? That would be quite important. And also linked to that is, what is -- if you can estimate that the World Cup impact in December.

Okay. Well, let's try and have a go at giving you a sense of how we're thinking about the volume, and Kevin, of course, coming in if anything to add on this. I think the first point to make here, Xavier, is that we we've become much more competitive. And as a result of that, our volume performance has responded encouragingly. And actually to have seen the performance that we've seen over 3 consecutive years now, I think, really points to how our Food First strategy is working. It's working because customers are trusting our value. And we -- as you've seen in the slides I've just shared, particularly the one on resilience, we're seeing less switching to get to the limited choice supermarkets than any of our full choice competitors. We are seeing customers and buy into our private label own brand because of Sainsbury's Quality more so than others. We're dropping less items out of the basket than others and we're also seeing customers trade up as well. So as you rightly say, of course, inflation is driving a lot of the sales performance. But in relative terms, we're really encouraged with our volume trends given what we've seen in the wider market. That's the first point to make. And we think it's a direct result of the choices we strategically made to improve our value position. I think in terms of how customers are behaving, as we've described, they're making very savvy choices to make their budget go further. And that's why we've seen, for example, own brand products improve 10% up in the Christmas period, ahead of our overall grocery performance as they manage their budgets. And I think Sainsbury's is well positioned. We have very strong private label assortment. It's one of the things that I think is a real point of difference for our brand. And that really came through in this period and will continue to do so. And so although volumes, as you say, are under some pressure as inflation takes impact, the question, I think, really is how resilient is the Sainsbury's brand, is the Sainsbury's assortment in giving customers real choice in what they want, and therefore, customers choosing to spend more of their shop with us. And that's what we've seen happen through this Christmas. Anything to add, Kevin?

Maybe 2 minor points. But just if you look at it over the 3 years, obviously, it's -- the volume is more resilient, building on Simon's point. And on the trade down point, we've seen entry price point grow percentage-wise reasonably strongly, but it's a very small part of our mix, which again helps our margin mix overall.

And then on the World Cup, look, I mean, I think can't really break out a specific kind of performance that it gave us other than to say that I would say we set ourselves as a team up with a really bold plan for this Christmas and this quarter 3, including making sure we could really deliver for customers through the World Cup period, however much progress we made -- or each of the nations made, I should say. And the reality of it is we saw -- clearly in our food offer, we saw a lot of strength come through in areas like pizzas and snacking through the home as people wanted to watch the match at home. We had a really strong proposition in beers, wines and spirits for the World Cup, and customers came back more than once to make sure they have everything they need for the match. And as I said, we saw our market share in televisions be particularly ahead of the market on the way into the World Cup. So I guess the key question for us is, did we set ourselves up for the opportunity that was there? And I think we did.