J Sainsbury PLC

LSE:SBRY

Earnings Call Transcript 2020-Q1

[Operator]

Hello, and welcome to the analyst call Q1 2019/2020 with your host Mike Coupe. Please go ahead.

[Michael Andrew Coupe]

Good morning, everyone, and welcome to the Quarter 1 Sainsbury's Trading Update Call. I'm joined on the line by our CFO, Kevin O'Byrne, and I'm going to ask Kevin to run through some of our Q1 highlights in a moment and then we will hand over to you for our Q&A.So Kevin, over to you.

[Kevin O'Byrne, CFO, Member of the Operating Board & Director]

Thanks, Mike, and welcome, everyone. I'll now take you through the key numbers for our Q1 trading statement, which covers the 16 weeks to the 29th of June.At a total retail level, sales, excluding fuel, decreased by 1.2% over the quarter with like-for-like sales down 1.6%. The contribution from new space was lower during the quarter as the pace of Argos and Sainsbury's store openings slowed considerably. Grocery sales were down 0.5%. In a considerably weaker market, this was a better performance relative to our competitors than Q4 with improved switch in trends.We continued to gain share in premium food categories while also improving our value proposition over the quarter, reducing prices on more than 1,000 everyday food and grocery products and introducing some more promotional activity. As we highlighted in May, we still have more work to do on our entry price point ranges, and this is something that we will talk about at our Capital Markets Day in September. We will also talk more about customer service where we saw continued improvement in customer feedback scores over this quarter. Despite the tough comparatives against last year's heat wave and events like the world -- the football World Cup and the royal wedding, our Convenience business delivered good like-for-like sales growth with continued sales -- total sales up 1.5% and online sales up 5.1%.General Merchandise sales fell by 3.1% with the reduced contribution from new space quarter-on-quarter of about 1%. Like-for-like declines were driven by weakness at Argos and Sainsbury's in key seasonal categories such as outdoor toys, garden furniture, gardening equipment and barbecues. Argos continues to see very high and improving Net Promoter Scores and continues to win market share in key categories. Fast Track collection grew by 20% and Fast Track delivery by 13%.Similarly in Clothing, the weather was very unhelpful with sales down 4.5%. However, our performance relative to the overall clothing market was very strong with good switching gains from supermarket and department store competitors. We gained volume and value market share and became the U.K.'s fifth largest clothing retailer by volume. Strong online growth was a contributor to this with online now accounting for nearly 8% of Clothing sales. We continued our investments in technology during the quarter, making shopping with us quicker and easier. 148 supermarkets now have SmartShop self-scan and sales penetration rates are rising rapidly. We now also have Argos Pay@Browse in more than 200 stores. So overall, a tough quarter in terms of the headline sales numbers where we had to navigate some significant market headwinds, but we saw a better market share performance in the Grocery business and continued market share gains in Clothing and key General Merchandise categories. We look forward to providing a fuller update on progress at our Capital Markets Day in September, and we'll now open up the call for your questions.

[Operator]

[Operator Instructions] First question is from Bruno Monteyne of Bernstein.

[Bruno Monteyne, Senior Analyst]

Just to confirm, I know you've cut the prices on these top 1,000 products. But overall, in the entire basket, I presume you're still seeing overall inflation of around 1%. Would I be right with that? And if that's the case, would I also be right to assume that your volumes in the -- in grocery and the supermarkets are down somewhere in the order of minus 1%? Just trying to check if that would be ballpark right.And the second one is, are you still completely comfortable with full year consensus of underlying PBT of about GBP 630 million? Could you please confirm you're still okay with that.

[Michael Andrew Coupe]

Yes, I'll ask Kevin to comment on the second. And yes, I mean, I think we'd point to Kantar or Nielsen. I'm looking at James. We're sort of measuring inflation at -- one in a little bit. Inflation rates have come down a little bit quarter-on-quarter, so the relative volume performance is better, but you can do the arithmetic, so you can backsolve it. It would imply that underlying volumes are down about 1% in the Grocery business.

[Kevin O'Byrne, CFO, Member of the Operating Board & Director]

And Bruno, just on consensus, it's obviously a trading statement. We don't routinely comment on consensus, particular given we're only 16 weeks into the year. But if there was something to say about consensus, we'd say it. It's probably also worth just noting because there were some questions this morning about the relative comparative gets tougher in quarter 2, and it's worth just looking at the 2-year like-for-like in that case because in the previous year, we had a good early summer as well. So on a 2-year like-for-like, the comparatives in quarter 2 don't look as demanding.

[Bruno Monteyne, Senior Analyst]

And one follow-up question on the entry price points. I mean you talk more and more about it and you'll say more at the Capital Markets Day. Can I just get the feeling for the timing of how long will it take, you think, to develop your ranges in pricing to get them out in the stores until you would say you have a new, better, improved offer in store? Are we talking, by the time of the Capital Markets Day in autumn, they'll largely be in the store or would be halfway? What's the time line for this repositioning, please?

[Michael Andrew Coupe]

We have a pretty comprehensive program -- plan between now and Christmas. As we stand today, around about 1/3 of the products in the business, you can actually see them. You can come and pick them out on the shelf. And by the time we get to the Capital Markets Day, assuming we deliver against the plan, it will be roughly 2/3 of the way through. So yes, you will see progress. And by then, we'll have better line of sight on exactly what happens in terms of volumes in categories and the relative up trade and down trade within categories, which is one of the reasons why the -- having the Capital Markets Day in September will be helpful to kind of explain exactly how categories react to the changes we're making and then to reconfirm how we can afford to do this.

[Bruno Monteyne, Senior Analyst]

And are you largely following the rebranding approach of Tesco where they invented new brands? Or are you sticking with -- largely with your existing Sainsbury's brands in this repositioning?

[Michael Andrew Coupe]

No, you can go and find some of the new brands on the shelf. They've been around for a while, so things like J.James, Stamford Street, delis and bread. So there are a number of brands, and we can probably show you some pictures if you can't pick them out yourself. But I mean there are a number of different approaches depending on the category, but there is an element of rebranding.

[Operator]

The next question is from Andrew Gwynn of Exane BNP Paribas.

[Andrew Philip Gwynn, Senior Food Researcher & Analyst of Food Retail]

Two questions from me, if it's all right. The first one is just on the entry price products. What proportion of the overall is -- are they, sorry? So just give us an idea of where the investment is coming, what's the proportion of the sales?And the second one is a much bigger-picture question, which is also taking a step back, like-for-like this quarter, a bit disappointing, presumably going to be quite soft again in Q2. But to what extent does that really trouble you? Is it just a function of difficult comparatives and actually, long-term view, the business is essentially unaltered? I know we're all getting a bit too excited about short-term trading.

[Michael Andrew Coupe]

Of course, you always get very excited about short-term trading, but I won't comment further on that.

[Andrew Philip Gwynn, Senior Food Researcher & Analyst of Food Retail]

It's our job. It keeps us employed, unfortunately, but yes.

[Michael Andrew Coupe]

But yes, we know the reality is that entry price points, as we would define them, account for a relatively small percentage, like 3%, 4% of our total sales. Of course, we have addressed pricing more widely than that. So as an example, we've got market-leading price on strawberries this week. And relative to the mainstream discount composition, we're seeing our pricing indices at the best-ever position that we've measured. So I think that would show our relative competitiveness, and we've actually won the Grocer 33 for the last 2 weeks on price. So again, that would suggest that our relative pricing has got reasonably significantly better. But the actual entry price points account for a relatively small proportion of our sales, a higher proportion of our volume for obvious reasons.As Kevin has already commented on, we had a better second quarter last year, but it was against our worst quarter the previous year, so you kind of have to look through the couple of years. We have seen an improving volume trend. You've seen that in the externally reported data during the course of the quarterly reporting. So it's fair to say our performance has got better, which would give us some encouragement that we're doing the right things. And we get to about the first week in August with the kind of weather headwinds that we've talked about in the first quarter. And after that, it was pretty dreadful, the remainder of August and September. So who knows how that's going to play out. So what would be the big picture? We've always said that our start point will be to maintain our volume share. That will be a good objective. As in how we get towards that objective? Time will tell, but there are some encouraging signs in what we're seeing so far.

[Andrew Philip Gwynn, Senior Food Researcher & Analyst of Food Retail]

But even with that volume share, I mean, obviously, there's elements of volume, which may be aren't worth chasing, so alcohol would have been maybe -- I mean does the trading performance at the moment really trouble you? Or is it just time -- a short-term blip if you were...

[Michael Andrew Coupe]

Well, it will be -- it will always be nice to be reporting positive underlying sales growth. To your point, we're not going to chase, as we said previously, volume for the sake of volume. But as we're 16 weeks into the year and as Kevin has already commented, we're comfortable with consensus and we're comfortable with what we're seeing in the reaction to the changes that we've made. But we are near 1/3 of the way through the year, so plenty of space to go.

[Kevin O'Byrne, CFO, Member of the Operating Board & Director]

Andrew, it's probably worth saying, we factored in different -- that we weren't going to have another stunning summer this year, and that was built into our plan. However, we haven't had normal weather this year. It's -- so that it's been worse than we would've expected. And hence, you've seen the impact on the seasonal lines. But there's still 80% of the full year profits to be delivered and so some way to go for the full year, obviously.

[Operator]

The next question is from Nick Coulter of Citi.

[Nick Coulter, Director]

Three from me, if I may, please. Firstly, on Grocery, can I ask about the improving volume performance in Grocery that you referenced? Are you able to quantify that, given it must be reasonably large against the backdrop of a weaker market in recent months?And secondly, on Clothing, I know that the number of promotional days is static year-over-year. But can I ask about your sell-through on spring/summer versus a normal year?And then lastly, on General Merchandise, I know you've taken share, but could you give a sense on the absolute trends for the nonseasonal categories to get a view on the underlying health of the Argos offer?

[Michael Andrew Coupe]

Really, I'm not sure I'm going to be able to answer all of those, but I'll have a go. Yes, I mean we don't quite have volume number directly, but I guess you can infer it from the fact that inflation was about 1.5% in the previous quarter and just over 1% in this quarter, so you can make the sort of direct comparisons. But if you then look at the underlying reported market data, the Kantar or Nielsen data, you'll see that our trend has got progressively better period-by-period as they have reported. So you can draw your own conclusions on volume, but you'd see reasonably strong progression over the course of the quarter.

[Nick Coulter, Director]

And what's driving that, Mike? What are the key factors that are turning that around?

[Michael Andrew Coupe]

Well, as I've already said, we're making a number of moves. It's always difficult to disaggregate these things. We'll talk more holistically about this at the Capital Markets Day in September. But if you are more competitive, your store standards are getting better and you're investing in parts of your offer. And we're also growing, as we have done in previous quarters, our added-value foods in around -- it's kind of moving in the right direction. So there's never a silver bullet. It's about lots of things on lots of fronts.But there's a degree of energy and confidence in the organization. Celebrating our 150th birthday, that was a great fillip for us. And broadly speaking, that kind of signaled a serious change in the organization, and we've built on that goodwill and momentum. So I'd say there's never a silver bullet. If I could point to something, we would just do more of that one thing. It's a whole series of things on a number of fronts. But it's undoubtedly the case that we are more competitive on price. And as I said, the fact that we won the Grocer 33 for 2 weeks running now, I think that's some sensitive money side of the business. So it does happen occasionally, but it doesn't happen sequentially that often.On Clothing, clearly, given it rained this year and it was sunny last year, there is stock to be sold. It's still relatively early in the season. There's still a long way to go. We are not uncomfortable. If we got another 3 or 4 weeks of rain, it probably would start to get uncomfortable. But as we stand today, we don't have the same sell-through levels as evidently as we would have been last year. We're slightly behind where you might expect to be in a normal year, but there's still plenty of time to go.And in GM, unsurprisingly, things like tech and the electricals going great guns; the seasonal categories, paddling pools and barbecues, pretty dire. And I gave the example last week, the weather was actually not unhelpful. But even then, we sold about 1/3 of the paddling pools that we did the previous year. And the Argos supply chain is -- and the Argos customer proposition comes into its own during these seasonal peaks. If you want a swimming pool, if you want a fan, you want it now, and the Argos machine is very, very good at delivering that. And in the absence of some half-decent weather, that's clearly been a drag on the business.

[Nick Coulter, Director]

Yes. I know it's somewhat academic, but if you backed out the seasonal, are you small up or small down? How would you -- if you...

[Michael Andrew Coupe]

Up, up, and reasonably substantially up.

[Nick Coulter, Director]

Okay. That's helpful. Then one last one, if I may, on online in Grocery. That's a decent clip of growth. What have you changed there? Or have you changed anything in the Grocery home shopping?

[Michael Andrew Coupe]

No. I like the word decent clip. That's a good phrase. Yes, I mean it's just continuation of the trend. Again, actually, the online Grocery business and the Convenience businesses tend to be more impacted by weather. So it's really pleasing, particularly the Convenience number because that business goes great guns when the sun shines because people tend to go out to buy their lunch more. So actually, of that performance in the business overall, I would point at our convenience stores being pretty stellar.On Grocery's online, it's pretty much continuation of the previous trend. There's an intergenerational thing as people get used to online shopping. As the new generation grows up, more and more people will shop groceries online for the foreseeable future. Operationally, we're about as good as we've ever been. We're about as efficient as we've ever been, so our service levels are very high, but the growth is just changing customer shopping habits, which is largely, although not exclusively, an intergenerational thing.

[Operator]

The next question is from the line of David McCarthy of HSBC.

[David McCarthy, Head of Consumer Retail, Europe]

A couple of questions. First of all, you gave us a Net Promoter Score for Argos. Can you give us the similar figure for Sainsbury? And then you mentioned switching data. You've obviously still got an outflow. So can you give us more color and more background on that? Are you winning share from anybody to any significant degree? Or is it just your reduction -- there's been a reduction in your net outflow?

[Michael Andrew Coupe]

Yes. I don't think we've ever quoted the headline NPS score. So I'm looking around me and everybody is nodding their head in the negative, so we won't. We may choose to at some point. But it's fair to say that the Argos Net Promoter Score is pretty high and it actually improved. And the Sainsbury's, what we would call, CSAT score has also improved in the quarter, and that's showing an improving trend. And we referenced the fact that on the 13 of the 14 measures that we look at, we have got better in the quarter. But I don't think we've ever quoted a headline number, Dave. And I'm looking at James and John and both of them are nodding their head saying, no.So as far as the switching is concerned, it's pretty much as you might expect. Generally speaking, the biggest impact on our business is from the discounters, and that's been the case for a considerable length of time, and it remains the case. So broadly speaking, that's where we are losing volume to, albeit less than we were previously.

[David McCarthy, Head of Consumer Retail, Europe]

Okay. So you're losing volume to the discounters. You've talked about you're going to -- more work to do on entry price points. Does that mean that when we're looking at our models going forward, we should be a bit more cautious on selling price inflation and that you'll have some relative deflation versus your competition?

[Michael Andrew Coupe]

Maybe Kevin would like to comment. But of course, it's difficult to predict that simply because we don't know what the competition would do. So it depends -- the way you framed the question, it depends on what the competition actually do relative to what we do. But we have seen, as we've already referenced, the headline inflation rates in the market come down by just under 0.5%. So one would expect...

[David McCarthy, Head of Consumer Retail, Europe]

The implication was that you're going to be doing more -- unless I've got this wrong, the implication was you're going to be doing more on entry-level pricing than perhaps most of your competition, so that's why I framed the question that way.

[Michael Andrew Coupe]

Well, I -- yes, so we are going to be doing more on entry-level pricing. That's for sure. And we are doing more on pricing overall, as I've already referenced. What I can't tell you is what our position may or may not do relative to that. So that's why I can't answer the question directly. But the results so far would suggest our pricing is better, and that's particularly relative to the discounters I've already referred to. Our price relative to Aldi and Lidl -- our prices relative to Aldi and Lidl being at the best level that we've ever measured. And we'll see what sort of reaction that provokes from our competitors.And we'll talk more fulsomely about the interaction between volumes, up trade versus down trade, et cetera, when we get to the Capital Markets Day in September because by then, we'll have a better line of sight on the reality of what happens in a less unstable trading period because at the moment, the numbers are very heavily distorted by rain this year versus sunshine last year, which inevitably, as you will know, has an impact on relative cash group performance.Is there anything you'd add, Kevin?

[Kevin O'Byrne, CFO, Member of the Operating Board & Director]

I was just going to -- it was just building on what you said about the Capital Markets Day. We'll have more experience, Dave, of the work we're doing in the -- in improving value and how customers are reacting, and the key thing will be the switching between the sort of entry price point into the mid-tier and the impact on premium. We're very pleased in the first quarter that we've grown the premium while investing and seeing improvements in the entry price. But clearly, we've seen other players in the marketplace where you over-index in the entry price point and you're losing the premium. And then clearly, that has quite an impact on your margin mix. So we'll have more experience and be able to discuss that in more detail come September.

[Operator]

[Operator Instructions] The next question comes from Sreedhar Mahamkali of Macquarie.

[Sreedhar Mahamkali, Analyst]

I've just got one question, actually. Most of the questions have been asked already. I think at the prelims, Mike, I mean you're very confident of securing improvements in COGS to fund your price investment, I think probably particularly entry point price investment. Has that actually been playing out as you expected? So that should really take care of your price investment plan for this year in the sort of pay-to-play you were talking about?

[Michael Andrew Coupe]

Yes. I mean there are clearly a number of moving parts. Improving volumes help. We'd always seek to negotiate with our suppliers and look for supply chain efficiencies and, of course, there's the self-help of reducing cost within our business overall. And those are all things that we are doing as part of this program. Clearly, we'll have better line of sight by the time we get to the Capital Markets Day in September. So I will defer answering more fulsomely your question. But by then, we'll have a much better understanding of the interaction, recovery of costs, et cetera, et cetera. So we can answer it better when we get to September given that we're already -- we're only at a few months into the program that we outlined at our prelims. I think that's it. So we've got no other people on the line, so thank you very much for listening. And if I don't see you, you all have a lovely summer. Thanks very much. Bye-bye.

[Operator]

Thank you, Mike. That concludes the conference call for today. You may all now disconnect. Thank you for joining, and enjoy the rest of your day.