J Sainsbury PLC

LSE:SBRY

Earnings Call Transcript 2020-Q3

[Operator]

Good morning, and welcome to your Sainsbury's Third Quarter 2019-'20 Analyst Call with your host, Mike Coupe. Mike, please go ahead.

[Michael Andrew Coupe]

Good morning, everyone, and Happy New Year, and welcome to the quarter 3 Sainsbury's trading update call which covers the 15 weeks to January 4. I'm joined here today by our CFO, Kevin O'Byrne. I'm going to ask Kevin to run through some of our quarter 3 highlights in a moment, and then we'll hand over to you all for the 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 some of the key numbers. Looking at Grocery first. Sales grew by 0.4%, representing a continued outperformance of our key competitors in both value and volume over the quarter, reflecting the investments that we've made in the customer offering in our stores over the last year and the ongoing improvements in service and availability. Behind the total sales growth of 0.4%, we saw lower inflation this quarter versus last year, so this actually represents a slightly better volume performance in a slower market despite a reduced benefit from new space. And we continue to generate strong growth in our online Grocery business, up 7.3% in the period. General Merchandise sales fell by 3.9%. Argos delivered a strong performance over the Black Friday period and outperformed a weak market in consumer electronics but was heavily impacted by very weak toys and gaming markets, where we have large positions, both of which saw double-digit declines. The gaming market in particular was down more than 35%, impacted by an absence of new product launches. Argos customer service metrics remained strong over the period with more customers shopping online and taking advantage of our Click & Collect and delivery services. Prepaid Click & Collect sales, for example, grew by 16%, providing a great customer experience and of course, reducing costs as people collected the products themselves. Finally, looking to Clothing, sales grew 4.4%. Full price sales grew by nearly 8%, with sales of seasonal products helped by the colder weather earlier in the quarter. And sales were helped by very good performance from our Christmas, party and gifting ranges. Online Clothing sales grew by more than 40%. And in the period, total group online sales accounted for more than 20% of the business, up 5% year-on-year. So overall, a tough backdrop and some challenges in General Merchandise but a good performance from our Grocery business in a weak market. Operationally, we're in very good shape across the business with strong availability and service, and we've exited the quarter cleanly from a stock point of view. We'll now open up the call for your questions.

[Operator]

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

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

So 2 questions from me. So first off, I would just -- I'll ask a consensus question because I'm sure somebody else will, but your thoughts on this year's number, but perhaps also next year's forecast as well? Very early stages, I know. Second question, obviously some weak performance in the GM business particularly, as you mentioned, in Clothing -- in toys and gaming. But to what extent does that matter for profit? Is there a significant exposure from a profit point of view to those categories? Is it really just better top line?

[Michael Andrew Coupe]

I'll ask Kevin to answer both of those, I think.

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

Okay. Andrew, first, on consensus, we don't traditionally comment on profit in a trading update. But as you will expect, if we had something to say about consensus, we'd say it, so you can infer we're comfortable with consensus. Next year, from memory, consensus is about -- is up 1%, 1.5% or something. We honestly haven't completed our budgeting for next year, et cetera, but that doesn't seem unreasonable at this point. On the General Merchandise, of course, they all contribute. You're absolutely right, toys and gaming would be generally lower gross margin products in the mix, so they're less impactful than sales shortfall in some of our other categories like home, for example, and general merchandise. But of course, they all contribute, so we've had to do some good work on costs to manage the bottom line.

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

Okay. That's clear. And then just coming back to the food business, obviously, any sort of standout areas there? I mean the performance for you is, as you mentioned, better than peers, is it also any of the listed peers at least?

[Michael Andrew Coupe]

No, it's reasonably sort of even in its performance. The Taste the Difference, volumes grew, so that was a big tick in the box. We continue with the program of rolling out opening price points, so we're on track to deliver what we said we would deliver. And then there's a lot of store refurbishments that's gone on during the quarter. So it's a very rounded sort of blended performance. The operational stats is probably the other standout thing, where year-on-year, all of the metrics we measure on customer satisfaction move forward. Our availability was as good as ever been. And things like speed of checkout were significant improvements year-on-year, which is testament to all the work that we've done in investing in self-checkouts but also SmartShop. And if you look at SmartShop as a factoring in and of itself, around 15% of sales in the stores that have it, so around about 500 stores went through SmartShop over the entire quarter, which shows how much our business is changing and how rapidly it's changing.

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

Andrew, just building on Mike's point, the Taste the Difference volumes grew, but the Kantar data yesterday would also show that we were the only traditional retailer to show growth in value own label sales, so it was a very balanced performance.

[Operator]

The next question is from Maria-Laura Adurno from Morgan Stanley.

[Maria-Laura R Adurno]

I just had a question with respect to space addition. Maybe if you can talk us through the different dynamics into this quarter and how you see that evolving in 2020. And then the second question, just coming back to toys and gaming. There is definitely a bit of a structural element, which is also the shift due to people using more tablets and not necessarily playing with the games. But just wondering in terms of 2020 if there's any levers that you actually think could potentially reverse the trend seen in the quarter?

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

Firstly, Mary, I'll talk maybe to the property ones. We've seen space reduction in the -- well, broadly flat actually in food and reduction in General Merchandise in Argos stores. And the dynamic behind the scenes was we closed about 23 convenience stores, which we announced at the Capital Markets Day, so we've just been getting on with doing that in the period. So we had a negative space drag on the convenience business in the period. Clearly, that's beneficial from a contribution point of view. And you'd expect that you would see, in time, space being reduced in the business, particularly in Argos as we close existing stand-alone Argos stores and don't replace all of them with store in stores.

[Michael Andrew Coupe]

Yes. On the specifics around toys and gaming, you can take it as read that we'll do a big review post-Christmas because, clearly, in the case of toys, it's now the second year running where there's been significant reductions year-on-year, and we need to make sure that we're maintaining our market share and our competitiveness in that part of the market. On gaming, it's clearly a structural change in the sense that more gaming is going online. But this year, it was mainly driven by the absence of a sort of big console launch. And we expect cyclically that, that would happen next year, this time next year. So probably a combination, as you say, of structural changes in the marketplace, but also, we need to go back and make sure that we've got the right exposure to the right categories in those markets as we go into next Christmas. Of course, at this time of year and beyond, it becomes much less significant as a proportion of Argos' business, so it's really only in the key Christmas quarter that these categories come into their own and they pay a disproportionate part of the Argos' General Merchandise sales.

[Operator]

The next question is from Bruno Monteyne from Bernstein.

[Bruno Monteyne, Senior Analyst]

My first question is trying to read in your commentary on whether the market in the U.K. is really getting worse or not. I took note of what you're saying about your 5th Price Lockdown, 1,200 products phased out, they've seen big price cuts. I look at the Kantar data showing market growth of 0.2%, which is also much lower than before. So would you say that today's top line market, in the market overall, the amount of price investments you guys have to put in is making things worse again? Or is it the normal humdrum, unusual promotional and trade planning announcement? The second one is, is there anything more you can say about your new value-oriented products that you were launching? When you had this other Capital Markets Day, you made it clear they weren't going to get prime position. You thought that was necessary. Any changes in the way you're approaching the merchandising, the rollout? Any successes or failures that you think are worth discussing?

[Michael Andrew Coupe]

Yes. I mean if you look at the market, I mean, I showed a chart last night at our leaders group, which basically says the growth in the grocery market has stepped down from around 1% to, as you've already rightly pointed out, virtually 0. That's partly a function of value falling out of the market. And I guess if there's a structural decline in volume, it's probably too early to call it. But clearly, the Christmas quarter would suggest that there's been a decline in grocery volumes over the quarter. Whether that's specific and uniquely to the last quarter, I don't think we'll really know until this time next year when we've got the sort of full extent of the overall trends. But probably the biggest headline driver of the market has been the reduction in inflation, which, by implication, is a result of the market being more price competitive. We are pleased in the sense that our relative volume growth is higher than our value growth. So from that perspective, we are seeing the actions that we're taking coming through in the stuff that we sell. I’m not -- there's not a lot we can add to the opening price point story in the sense that we don't do a lot of stuff in that area, but a lot of category reengineering over the Christmas period, we kind of get back into the full flow of that in the last quarter. So I suspect we won't talk more extensively about this until we get to our prelims update in May, so there's not a lot more other than what we've already said and certainly, not any significant changes in our approach.

[Operator]

The next question is from Clive Black from Shore Capital Markets.

[Clive W. Black, Head of Research]

I would imagine, post the general election, everybody in the North is full of the beans of joy.

[Michael Andrew Coupe]

The red wall, Clive.

[Clive W. Black, Head of Research]

The red wall. And I just wondered in that respect, Mike, given you are an experienced player in this industry...

[Michael Andrew Coupe]

You always say that to me. Thank you.

[Clive W. Black, Head of Research]

Do you see the potential, given greater -- well, given less uncertainty and perhaps a stimulation by the government through a variety of levers for household expenditure to improve? And in that respect, do you think it's reasonable that the grocery industry should capture some of that?

[Michael Andrew Coupe]

Yes. I mean, certainly, post the general election, we saw no difference in the trading pattern in our business. And I've talked on the media call about the fact that you could characterize ours as almost twin peaks. We had a very strong month end in November; it then got really flat in the first few weeks of December; and then peaked very strongly around the weekend before Christmas and Christmas week itself, so nothing obvious directly after the general election. And when it comes to how our customers are feeling, I suspect your analysis is right. It will largely come down to the sentiment out of the budget probably is the next most significant event in March. In theory at least, the customer trends should work in favor of retail in the sense that customers have more disposable income, inflation is comparatively low, and therefore, that should reflect itself in trading up in grocery and in people buying non-consumables. I think the story of Christmas will be that that's not actually reflected in what customers have really done. And of course, another significant announcement in the last few weeks has been the 6% increase in national living wage, which, again, you'd have to believe should ultimately flow through into customers having more money in their pockets and using that money to buy stuff that we sell. But to be quite honest, Clive, we are planning on the basis that it's not going to get any better in the next year and that we'll structure ourselves accordingly. If there are fiscal stimulus put into the -- in the market as a result of the budget or anything else that the government chooses to do, then we'll benefit from that as and when that happens, but I'm not holding my breath.

[Clive W. Black, Head of Research]

And just your comments on the national living wage, is that ahead of what you would have been expecting prior to the election?

[Michael Andrew Coupe]

Yes, for sure. I mean if you take the sort of general trend, it's of the order of 4%, 4.5%, so absolutely. But we're in a great position in the sense we made a big move to GBP 9.20 an hour, so we've got plenty of headroom between where national living wage will go and where we are currently. And we've reflected on the fact that having made that big year-on-year increase, we effectively have no wage inflation in the second half of this year. And as we look forward into next year, we'll obviously take a view on where we need to pitch ourselves in the light of the national living wage for the next wage round.

[Clive W. Black, Head of Research]

And just as a second and final question, I should add, from me, the 20% participation online across the group, where do you see that progressing just in terms of a general expectation over the next few years?

[Michael Andrew Coupe]

Well, I think you could probably attribute 5% to 10% growth year-on-year on year. So that will gradually move towards 25%, 30% on that kind of basis, plus or minus a bit. And to the question around space, you'd expect us to have less retail space in 5 years' time. So the way that -- the shape of the business in 5 years will realistically be probably 25% to 30% online, 75% to 70% through core physical real estate. And that's very much in line with the way that customers are choosing to shop. And we'll, hand on the tiller, steer the ship in that broad direction assuming that nothing changes in the way that customers are behaving.

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

And Clive, you've seen quite a dramatic change in Argos. If you look at year-on-year, we've gone from about 35% of the sales in stores last year, people came in, we didn't know they were coming before, they haven't reserved anything this year, it's dropped down to about 31%. So we're seeing quite a move. We've still got lots of people coming in to collect things in store, but that's also reducing slightly over -- so the overall store mix is reducing. The nice thing is our leases are on 4 years average leases, so we can change the shape of the estate as customer habits change.

[Operator]

The next question is from Nick Coulter from Citi.

[Nick Coulter, Director]

Just if I may follow up on your Grocery volume comments, I'm not sure about the last 4 weeks, but I think Kantar has your like-for-like inflation as incrementally positive and as you say, below the market. Would you broadly agree with that observation? And then secondly, still on Grocery, on your promotions, could you comment on the shape of your promotions and your like-for-like promotions in or through the quarter? And I guess that's with regard to the usual levers of fuel, BWS and I guess, twist wraps given the season. And then lastly, on General Merchandise, could you give a sense of the negative space impact in the minus 3.9%? My understanding is that there's a small positive contribution in Grocery, so presumably, there's at least a few tens of bps in the minus 3.9%. And then I guess, just on performance information for me on Kevin's inventory comment. I mean, clearly, not a problem in Clothing whatsoever, but presumably, you successfully cleared the General Merchandise inventory in the period.

[Michael Andrew Coupe]

Yes. I'll ask Kevin to comment on the second 2, and I'll have a go at the first 2. I think I'll defer to James to sort of explain behind the scenes exactly what the shape is. But broadly speaking, our volumes, we are deflating -- sorry, we're inflating less than our competitors is the best way of summarizing it.

[Nick Coulter, Director]

So you have a negative mix as well presumably?

[Michael Andrew Coupe]

Yes. So the realized value per item is less than it was, if that makes sense. But you can -- it's probably better to have a more detailed conversation with James behind the scenes to sort of unpack the Kantar data because it probably hides a multitude of sins. But by definition, if we're putting more opening price points into the business and that part of our business is growing, it has effects on the average price per unit sold. And as we've described at the Capital Markets Day, our measure of success is that we grow our volumes and our cash profitability, which, broadly speaking, is in line, if not -- and we're actually achieving probably slightly ahead of that ambition. As far as promotions in the round, lots of noise, as usual, a pretty intense trading period. But if you look at fuel and wine, we didn't really do a lot in twist wraps, but fuel and wine, we did it more, but then all our competitors did more. And if you look at fuel stunts, number of days on promotion, then Tesco were almost twice where we were; and Morrisons were about 60% higher than where we were. And both of them basically added more days and we added about the same number of days year-on-year. Similarly on wine. But on the other side of the equation, if you look at Kantar, it will show that our ongoing promotional participation actually dropped year-on-year. So in the round, we would take the view and we'll need to do the analysis, so this is very much sort of first cut, but we take the view that, broadly speaking, the business was about the same promotional weighting year-on-year. So we think, broadly speaking, it plays a draw against a backdrop where the level of promotion intensity probably went up. And probably the most significant number is the fact that people like Aldi were actually more promotional year-on-year, significantly more promotional year-on-year, which would suggest that they were also driving at keeping that in line.

[Nick Coulter, Director]

And Lidl I guess as well. Okay. No, that's helpful.

[Michael Andrew Coupe]

Lidl ran a big Daily Mirror promotion, which year-on-year was quite significant for them. And then on space and inventory, Kevin?

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

Yes. Nick, on space, the impact of space reduction in the Argos estate would impact sales by about 0.4%. And then if you look across stock, the areas we'd worry more about in General Merchandise, we think, are electronics just because they have a sort of short shelf life essentially, just fashion items, so we don't really have an issue there. We clearly have a little bit more toys, but it's all stock that we can trade through in the coming period.

[Operator]

The next question then is from Rob Joyce from Goldman Sachs.

[Robert Joyce, Equity Analyst]

A quick first one on the food inflation, can you just give us an idea of, in absolute terms, what that inflation number is now running at and how that compares to the previous quarter?

[Michael Andrew Coupe]

No, because there's not…

[Robert Joyce, Equity Analyst]

Maybe the size of the move, Mike, quarter-on-quarter?

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

A bit of color, Rob. It's less than 1%, and as you'd expect, the deflation in kind of grocery, meat, fish, poultry, produce, et cetera, in that period and a little bit of inflation in other areas, on not fresh areas, and broadly less than 1% across the piece.

[Robert Joyce, Equity Analyst]

Okay. And that's down, what, maybe 100 bps since the previous quarter, a bit less?

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

Yes. It will be because -- and particularly with the mix of fresh and produce in the Christmas quarter will impact us.

[Robert Joyce, Equity Analyst]

Okay. And then a couple of more on the GM side of things. You mentioned that Black Friday was very strong. I think this time last year, you were saying you didn't play in Black Friday. Should we read that as saying you decided this year you needed to get involved in Black Friday? And then the second one on the GM side, just give us an idea of, if you could, what percentage of sales the gaming category represents?

[Michael Andrew Coupe]

Yes. On Black Friday, we didn't say we didn't participate last year. We just said that we did -- we down-weighted some of the activity particularly in the Sainsbury's channel, so we did a lot less in the supermarket chain. Black Friday this year was mostly helped by the fact that it moved back by a week year-on-year, and therefore, it coincided with payday, which meant for the market generally and for us in particular, it was incredibly strong. But it probably, on balance, brought forward sales from the subsequent few weeks. And I've referred to the fact that, you can argue, we've seen that the Argos business, it was basically a story of 2 peaks: one, to coincide with Black Friday, fueled by the fact it coincided with the payday; and then Christmas week itself or the weekend before Christmas was incredibly strong as well. But the bit in the middle was challenging, and I suspect that would be reflected across the market.

[Robert Joyce, Equity Analyst]

Does that pull forward mean you sell more on discount?

[Michael Andrew Coupe]

We basically buy the stock to sell, and we'll sell it as and when our customers want to buy it. But basically, they have money in their pocket to buy it over the Black Friday weekend, and that was reflected in our sales and probably the market more widely if you look at the BRC data.

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

And Rob, on the size of the -- what we've talked about before, the gaming and toys market over the Christmas period would be just over 20% of the GM business. We've got big shares in these markets. We've got about 18% of the gaming market in the U.K. We've got over 30% of the toy market in the U.K. So they're very important to us in this quarter.

[Robert Joyce, Equity Analyst]

And would they roughly split half-half gaming and toys within that 20%?

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

Toys would be bigger.

[Operator]

The next question is from Xavier Le Mené from Bank of America Securities.

[Xavier Le Mené]

One quick one actually from me. You have been offering better value in recent months, we can say, and you have been developing the entry price unit products. Where are you currently in that journey? Do you think that you made half of that or you're almost at the end, just to go to what is left for 2020, 2021?

[Michael Andrew Coupe]

Yes, we said we'll be effectively 90% complete by the end of this financial year, so that's about 8 weeks to go. And I think we're 160 down and counting. So there's still work to be done. As we've already referenced that sort of the 6 to 8 weeks before Christmas, we don't do any significant category reengineering because it's not a good time to be doing it, but we'll clearly get back into the flow of things in the final quarter. So work to be done, but if I just do the arithmetic, we're probably 2/3 of the way through the range development as we stand today.

[Xavier Le Mené]

Right. And if I may add actually, in terms of pricing, where do you stand today? Are you happy with your price positioning today? Or do you think you need to do more going forward especially given the volume improvement you had?

[Michael Andrew Coupe]

Yes, I mean we're happy with our price positioning in the sense that it's a sort of measure of today. Who knows what the competitive dynamics will be in the future. And we'll all ride through the cut and thrust of a very competitive grocery market. And our ambition continues to be that we would want to grow our business across all of the category tiers, not just one category tier. So we would judge success not just by growing at new price point, but also by growing Taste the Difference, distinctive brands and our standard branded and own label ranges, so to fill the bath evenly rather than at one particular end or the other.

[Operator]

The last question comes from Andrew Porteous from HSBC.

[Andrew Ian Porteous, Analyst, European Retail]

A few from me, if I could. Well, they're all on the GM side. Just thinking about the mix of sales, particularly on the online business, you flagged that Click & Collect growing a lot quicker than the Fast Track Delivery. And I was just wondering whether you've got sort of one eye on running Argos a little bit more from a -- sort of with a focus on cash profit rather than sort of driving the growth in things like the Fast Track Delivery. A second question just on the toy and gaming category again. It just seems like a category where you seem to have struggled a bit more than some of the other players in the market over the past couple of years. I'm just wondering, is it a category where you underperform the market? And is it one where you feel sort of competitors are perhaps targeting you guys a bit given you've got such a big market share in things like toys? And then the last one was on the consumer electronics side of things, where you clearly outperformed. There's no comment on sort of the market. I mean have you outperformed a good market there? Or given the overall like-for-like, is it fair to assume that all categories across GM were a bit challenging?

[Michael Andrew Coupe]

I'll let Kevin have a go first, and then I've got a couple of comments afterwards.

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

On the consumer electronics market, your last question, Andrew, is that the market is down a bit and we outperformed it, as you said, so it's down a few percentage points. Now we've only got a detailed measure on the market up to the end of November, so we don't get the full December measure, but we think that trend continued. Toys and gaming, I disagree. I think we've held our share well over the recent periods. We've had a bit of share pressure in -- recently in toys in some of the infant and some of the pre-school areas in a competitive market. But over a longer period of time, we've held our share there. We'll need to revisit that after Christmas, as we always would, and see is there more we can do. At gaming, we're comfortable with our share position in gaming.

[Andrew Ian Porteous, Analyst, European Retail]

Okay. Yes. Just a follow-up on toys, if I could do very quickly. It's one where people were perhaps a little bit more optimistic this year because it seemed to be a few more events around Frozen 2. Did that just come a bit late and it just didn't come through? Or...

[Michael Andrew Coupe]

Yes. I mean, as Kevin has already said, it's too early to have done the complete postmortem. But for the second year running, the toy business was down double digits. So broadly speaking, toy volumes have dropped by around 20% over 2 years. And as a big player in that market, we've clearly taken our share of that impact. The question that was asked earlier is to what extent is that structural, as in people just fundamentally changing their habits, how much of it is cyclical because of the sort of release schedule. And that's a piece of analysis we'll have to do once we've seen all the market data. We don't see ourselves losing share in the way that you've described. And clearly, it's a market that people would look at -- or our market share where people would look at avariciously. But nevertheless, we think we've done a pretty good job of, broadly speaking, maintaining our share. And the other point to make, which is pretty obvious, is that those categories are disproportionately large in the run up to Christmas and therefore, have less impact in the sort of normal -- such as they are, normal trading periods post-Christmas and for the rest of the year.

[Andrew Ian Porteous, Analyst, European Retail]

That's really helpful. And just on the profitability within Argos, have you been a bit more profit focused?

[Michael Andrew Coupe]

We're always profit focused, but we always strike the balance between offering fantastic value to our customers, maintaining high levels of service throughout our business and generating profit and cash, but you can take it as read. And certainly, in the analysis we gave at the Capital Markets Day, one of the key measures of our ongoing investor sell is the fact that we are a cash-generative business and we will look to reduce our debts significantly over time. And we're in line to do that this year, and we'd expect to do it in the subsequent years on the back of the work that we've done. And clearly, Argos played a part in that.Okay. Thank you, everybody. I wish you all a Happy New Year. I'm sure we'll see you over the next few weeks and months and wish us luck in the last quarter. Thank you.

[Operator]

Thank you, Mike. That does conclude the call for today. You may now disconnect. Thanks for joining, and have a very good day.