J. Sainsbury - Justin time Mr. King!

J. Sainsbury: With every update you increasingly have to wonder whether Justin King’s best decision at Sainsbury’s really was to leave before his reputation came under pressure from industry upheaval. His successor, Mike Coupe, has been promoted to the hot seat at a time of major competitive challenges. These interim results, to 27^th September 2014, also encompassed a strategic review. The top line, underlying, LFL sales were down 2.1%, with quarter 2 being worse at -2.8%. Underlying pre-tax profits were down 6.3% at £375m, with eps down 12.7% at 14.5p. This interim dividend was, against some expectations, held at 5p, but we will come back to that later. In the strategic review they foresee negative LFL sales for “the next few years”. They will invest £150m into lower prices, whilst increasing non-clothing and launching clothing on-line. In the period to 2018 they will open 850,000 sq. ft. of new space, with over half being convenience stores. This is a big step down from the 750,000 sq. ft. expected in 2014/5 alone. To protect the balance sheet, which has £2.3bn of net debt, they will target cutting a cumulative £500m from operating costs over the next three years and reduce capex to £500m - £550m p.a. To put this in context capex was £562m in this first half alone, with previous guidance having been for £925m for the full year.

Despite the capex cuts, the dividend is taking its share of pain too. They are explicit in expecting “profitability to be lower in the second half than the first half”. They also state that the dividend will be determined by using two times cover on underlying eps this year and in each of the next three, with “our dividend for the full year....likely to be lower than last year”. Analysts forecasts have a wide margin of error just now, but if JS make say 25p of earnings this year (which would be the 14.5p in the first half and a hair-shirted 10.5p in the second half), then that implies a full year dividend of 12.5p against 17.3p in the last financial year. Given market conditions (we still await Tesco’s next price response), the year to March 2016 may see again see lower eps and hence the dividend would fall again. I was nervous of this stock when I wrote about it in early October and nothing here makes me any more optimistic. (Neil Cumming^, 13^th November 2014)

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about. 

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