J Sainsbury plc (SBRY) Earnings Call Transcript & Summary

Hello, and welcome to the Sainsbury's Q3 Trading Statement 2023/2024 Analyst Q&A Call. On the call this morning is Simon Roberts, Chief Executive; and Blathnaid Bergin, Chief Financial Officer. I will now hand you over to Simon Roberts, for the presentation.

Thank you, Olivia. Well, Happy New Year, everyone, and good morning and welcome to our quarter 3 presentation of results covering the 16 weeks through to January the 6. I'm going to talk for a few minutes about our trading performance in the quarter. And then, of course, as always, Blathnaid and I will take as many of your questions as we can. Now, the webcast is going to show the slides I'm going to refer to over the next 10 minutes or so. And we've also sent them around this morning by email. And of course, they're available on our website too. So let's get stuck-in. So we talked clearly our interims about our plans and our bold ambitions for Sainsbury's in the all important third quarter of this financial year. And these really delivered through the whole of the period. And we carried the strong momentum into the 6 weeks of Christmas, with customers recognizing our great value right across the store and across the offer, really engaging with Nectar Prices, the first Christmas with Nectar Prices, but also treating themselves by trading up more and more by trading up more and more to taste the difference. Now, Argos outperformed what was a weak and highly promotional general merchandise market, with a great performance, particularly over the Black Friday period. But sales did decline ahead of Christmas, and that was against an exceptionally strong performance last year. And I do just want to give a huge thank you to all of my colleagues, not only those in stores who delivered outstanding service, but also to everyone working in our depots throughout every part of our operation and right across our store support centers where the task of delivering on our bold ambition and maintaining our fantastic momentum really has required a huge step up right across the business. Against tough comps, we really did step-up our grocery volumes. And this was only possible through really deliberate and focused planning and then really backing ourselves to the redeliver, particularly over the peak Christmas period. Now in stores, this translated into a further widening of our lead versus competitors in overall customer satisfaction. And we saw significant switching gains from all of our largest competitors. Now looking at some of the detail behind this, you can see on this chart that, that leading position is a result of being #1 on the metrics that really matter most across the product offer, across customer service, and across store standards. And ultimately, this really does reflect the fact that however hard we plan and however well we deliver products into our stores, it's the 120,000 colleagues in our stores and out on the road in our delivery vans who really make the difference to customers, as you can see on this chart. Now, I've talked before about the very deliberate choices we've made to deliver growth and improve our business. And last week, we announced another key strategic investment with a 9% pay increase for all of our hourly paid colleagues, taking the hourly wage rate to an industry leading GBP 12 an hour from the start of the new financial year. Now, this is really important to us, because engaged and motivated colleagues are a key driver of how we expect to continue to deliver sales and profit growth. Now, this chart shows sales growth over 16 weeks of the quarter of quarter 3 and in the grey bars, but also in the shorter 6 week periods in the Christmas period in the orange bars. And so looking at grocery first, well quarter 3 growth of 9.3% was slightly higher than quarter 2. And that was despite inflation roughly 250 basis points lower. So, really a fantastic volume performance through the whole of the quarter. The headline Christmas growth rate was a touch slower, but with inflation falling through the quarter year-on-year, actually the volume growth in the 6 week period was slightly higher than the quarter 3 average overall. So a really fantastic performance against very tough comparatives. General merchandise growth, excluding the impact of the Republic of Ireland closure, which is shown on the right hand side of the middle box shows that we grew sales over the quarter, but we saw a weak performance in the run up to Christmas. And this was against the period last year, when you may remember we benefited significantly from the Royal Mail strikes. And also at the same time, we saw strong demand last year for energy saving devices like air fryers and electric blankets. Clothing sales in the quarter regained some of the momentum in what was still a very heavily promotional market, but they were weaker over the Christmas period against the time when the weather was colder last year. Now, we showed you these charts at our interims back in November, really highlighting that we'd outperformed the market on volume growth every week since the start of the financial year. And against some tough comparatives over the key events in particular, we're really proud of having maintained this track record. The right hand chart here shows the switching gains that we've achieved from all of our biggest competitors. And this means that over the course of the quarter, we grew volumes faster than 4 out of these 5 largest competitors. I think it's also worth noting that the Nielsen numbers showed a much tighter spread of growth rates over the period, with our performance being very close to the strongest in the market. Now, the consistency of the proposition we're delivering for customers across value, quality, innovation and service, then really pays dividends when you head into key events like Christmas, where we maintained this outperformance, as you can see. And this slide, I think, really demonstrates the consistent momentum since we reset our grocery business in 2020. When we look at our volume outperformance at Christmas in the last 4 years, despite some really tough comparatives, this was our fourth consecutive year of outperforming the market, but also the strongest period of outperformance of those 4 years. Now, we've continued to improve our value relative to the market, which has been a significant driver of the consistent volume share gains we have delivered. The numbers in the left hand box showing further year-on-year improvement in our pricing index compared to key competitors. Now, this was our first Christmas of Nectar Prices, and that really delivered for customers too across more than 6,000 products, unlocking our best ever Christmas rose to under GBP 3 per person and driving Nectar participation on big basket shops to 90%. And we've started the New Year with an extension of our Aldi Price Match campaign, now with 550 of the products customers buy most often matched on price. Customers are trusting us more than ever to deliver consistently great value. Now, we're proud of the work we do in our communities and our Christmas Nourish the Nation initiative was a great example of this, with all the proceeds from the sales of our GBP 0.15 and GBP 0.19 Christmas vegetables going to support communities in need over Christmas. This helped contribute to total fundraising of over GBP 6 million in the quarter to help tackle food poverty. 14% of adults in the U.K. have experienced food insecurity and we are focused on ensuring that no good food goes to waste. And in the quarter, we donated more than 4 million meals through our partnership with Neighbourly and our front of store donation program. Now alongside value, we've continued to extend our ambition and our delivery on innovation. And we're really encouraged by the progress we continue to make in bringing bold new innovation for the key events. This Christmas we launched 170 new Taste the Difference products. And Taste the Difference already has the biggest premium own label participation of all the full choice grocers as you can see. So the fact that the volumes grew faster than anyone else in the market over quarter 3 and Christmas tells you that more customers are choosing Sainsbury's when they want to put something special on the table for a big family event. And again, this is growth on growth with 13% Taste the Difference sales growth this year on top of a very strong growth last year too. So turning now to Argos, as you can see in the chart here, we outperformed the market for the majority of the period with a particularly strong Black Friday performance. But as I mentioned earlier, the market was also heavily promotional, bringing some margin costs to those sales. In addition, you will see that we dip below the market in the 3 key weeks just before Christmas. So when we then look at last year's sales trend shown here in the dotted line, we knew we had a tough comparative against the Royal Mail Strike last year, when we really benefited in the run up to Christmas from our click and collect and store walk-in proposition in particular. But the impact was a bit more year-on-year than we'd anticipated. This is also clear in the difference between the performance in the first 10 weeks and the second 6 weeks of the quarter last year shown on these charts on the right hand side. And this was probably amplified by the relatively warm weather this year too against a period last year, when the weather was colder and customers were focused particularly at that time on energy saving products. You can see the bounce back since Christmas, but the market remains tough with customers spending cautiously and a high level of promotional activity in the market. So wrapping up, we're really pleased with the momentum that we've built at Sainsbury's and we're winning customers from our competitors and customers are doing more of their grocery shopping with us. Having lifted our guidance to the top end of the range in November, we are reiterating our full year guidance on both profit and free cash flow today, with a very strong grocery performance offsetting a weaker performance from Argos in what was a very promotional general merchandise market, and against strong Christmas performance last year. And we continue to think that we're getting the balance right for customers, colleagues and shareholders, investing to maintain momentum at a time when not everyone in the market is in a position to invest. And this is helping to lay the foundations for further growth. And as a team, we're really looking forward to talking to you about the next phase of our strategy in February. So thank you for listening to that. I'm now going to open up the call for Blathnaid and I to take your questions. Thank you.

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

Two questions, if I can. So firstly, again, just unfortunately on Argos, just help us understand a bit more about the market. I suppose, why is this so much more discounting? Is it an inventory position for the industry? And maybe just comment on your inventory position as well as we head into 2024. And then the second question, Nectar Prices, obviously an important part of the performance during this year. I mean, I don't know if it's possible, but is it possible to pull out the potential kind of contribution to sales growth, and perhaps as much helpful next year as we cycle that comparative?

Andrew, well, why don't maybe Blathnaid give us a sense on Argos, and then I'll talk to Nectar. Blathnaid?

So if we stand back and look at Argos, Andrew, it was a really tough comp. I think that's the first thing we need to bear in mind. There was weather, World Cup, postal strike, and it remains a tough comp as we move into Q4. But that was very much within our guidance. So we're comfortable with that. Argos has consistently outperformed this year. And if we look at the last 2 weeks, again, it's still outperforming the BRC. So we're comfortable with its performance. Our view on the consumer, it hasn't changed. What we're seeing is consumers are spending cautiously. They're spending what they need to spend, and they're also spending for events on that as well. What would change our position? Look, if the weather changed and it turned a little bit colder, we might see increased demand there, particularly on some sort of your electric blankets, your home heaters. So we'll be keeping an eye out for that. On the stock position, the market is more promotional. We're comfortable with where we are. We cleared as we went through. So we reacted to what we were seeing going on in the market, what we were seeing going on with weather, and we cleared our stock as we went through the season as well. So we're pretty comfortable with how we've exited on that one.

Thanks, Blathnaid. Okay, and then turning to…

Is it possible to pull out an approximate profit impact of where general merchandise is versus big budget, just so we can understand how much the drag is on the group performance?

Yes, I mean, maybe just to comment on that. You'll remember, Andrew, at the interims, I remember saying at the time, when we started the year, we said to you, the range was GBP 640 million to GBP 700 million. And we said that, things would all have to go our way in GM to get to the upper end of our range. I think in November, we said, look, it was a pretty soggy summer. So we didn't have the benefit of a strong or even an average summer. And as Blathnaid has just said, a combination of a highly promotional market. I mean, we should be honest, the customer in GM is still highly cautious. There's a real caution in spend there. And so the fact that, this morning we can confirm that we raised our guidance in November to GBP 670 million to GBP 700 million, we're very comfortable with that range. And we've come through now a tougher Christmas period with particularly exceptional performance last Christmas we anniversaried. I think that just shows the strength of the performance in the grocery business. And you know, too, that we had some headwinds in financial services. So in terms of overall the performance of the business, we remain on track for the upper end of the guidance that we described. Shall I come on to Nectar?

I'm sorry, I interrupted on Nectar prices, sorry.

Yes, no, just to come to that. So Andrew, thanks for the question on Nectar. Look, I think the key point we'd want to make here is we are really delighted with the launch of Nectar Prices. It's been an absolute game changer. And if we think we launched Nectar Prices at the end of April on 300 products, and this Christmas, it was available on over 6,000 products across our assortment. And customers have really bought into Nectar Prices. They love it. This Christmas on an average GBP 80 Christmas shop, customers were saving GBP 16. It really gave customers reasons to shop with us. And you can see in our volume performance, I mean, I would not stress the point, I showed the chart there on how much we've outperformed the market, our volume is approaching mid-single digit growth there. And Nectar Prices is really helping to drive that performance for us. And I think, look, in terms of the progress here, really pleased we've been able to land it so well. The team have done a fantastic job in scaling in 9 months so extensively. Customers are really buying into it, 18 million customers now. And look, I'm sure we'll talk next month about the progress we've made on Nectar and where we see the further potential.

Our next question is from Sreedhar Mahamkali from UBS.

Three questions then please. I think Simon, just as you finished, you talked about further growth to come in encouraging us to come to the strategy update. So I was just wondering, if you could build on a little bit to give us a sneak preview of what we should expect at the strategy update in 3 weeks or something from now? That's the first one. Secondly, on grocery, clearly very strong performance, any comments on the market as we enter 2024? Clearly, we're seeing some moves from early little price matches, people replicating your strategy. But does it big picture feel like a normal January cut and thrust or is there anything more to it at this point? Clearly, industry has been very rational through the last number of years now, 2, 3 years. The third one, just on food for strategy clearly is very visible for us all, the share gains and the price improvement, price perception improvement, they're all coming through. Talk a little bit more about in terms of trade-offs in brands that deliver, more broadly maybe GM and Argos given the recent performance. Is there anything in your mind that's changing your view on Argos' ability to contribute sustainably to profit growth in the midterm?

Thank you, Sreedhar. Okay. Let's take those questions in the order that you've asked them. So first of all, yes, we're really looking forward to being together with you and everyone on the 7 of February. And look, our intention on our strategy update is to give you a really good insight into how we're intending to build upon the progress we've made over this period. And really importantly to focus on where we see the opportunities, how we're preparing for them, how we're preparing as a business for them, and what it will mean for our customers and our colleagues, and of course, our shareholders. And just as you've made the question would really make the point, we've got a lot to talk about. So look forward to seeing everyone on the 7 of February to take that conversation further. In terms of the market, look, I think we're seeing much of what we've described through '23. This, as we all know, is an incredibly competitive, intense market. I think that really showed up through Christmas. Everybody really came to the market with something to try and win customers. We are really pleased with how we've performed. As I say, the fact our volume growth was so strong, the fact that we have taken share and the fact that it was our fourth consecutive Christmas. And I think what we're seeing is a market that continues to behave very rationally. I don't think we're seeing anything this beginning of '24 that's any different than we've seen before. Value is always front and center as we break into a new year. You can see from the Sainsbury's team, a big focus on the price match, our biggest ever, a GBP 23 million investment this January. But you can also see others deploying their plans as well. And I think that continues that theme of rational behavior in presenting value to customers at this time of year. We start the New Year with fantastic momentum. We are really encouraged by our grocery performance, not just over the Christmas period, not just over the quarter 3 period but throughout the year. And we carry that momentum into this year. And as we come to your question on the broader brands that deliver, let's just be really clear. As Blathnaid said, it was a tough comp for us, particularly in Argos because we had such an exceptionally strong benefit last year from the post-strike. We didn't mention actually in the running, we had a World Cup last year, we shouldn't forget to. People bought a lot of big televisions for the World Cup last year. And in the energy challenges of this time last year, people bought a lot of personal devices to keep warm, whether that was an electric blanket, whether it was a jumper, whether it was an air fryer to cook more efficiently. So there was quite a lot of one-off effects last year that we've anniversaried. And actually to have come through the quarter and sales overall in GM were up 1.5%, I think just shows that customers are very confident in coming to us for those products. And actually, we took a lot of share as you've seen in the quarter as well. So we come into this year with that momentum. And, we'll talk to you next month about all the things in all parts of the business that we can see as opportunities to drive forward.

Yes, the only other bill that happened that is the Argos is a cyclical business. We've had the weather we've had over the summer and into Christmas and those tough comps, but it is a big contributor to our business overall. So, next year, let's hope we get a warm summer and a cold winter. And honestly, it's sort of where we're to end on that one, but it is cyclical. So we've got to ride it as it comes.

Our next question is from Freddie Wild at Jefferies.

So first for me, could we please get some more color on Sainsbury's bath inflation versus industry inflation in the quarter and then maybe within the quarter, how your pricing versus peers changed throughout the period? And secondly, with the cold weather coming back and the toughest comps now passed, can we assume there's been some recovery in Argos later on and that we might now move to a less promotional industry stance? And finally, are you seeing a difference in how the consumer is spending in clothing versus general merchandise and about how promotional those 2 industries relatively are?