J Sainsbury plc (JSNSF) CEO Mike Coupe on Q1 Trading Statement 2019/20 Results - Earnings Call Transcript

Jul. 03, 2019 9:54 AM ETJ Sainsbury plc (JSNSF)
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J Sainsbury plc (OTCQX:JSNSF) Q1, Trading Statement 2019-20 July 3, 2019 3:45 AM ET

Company Participants

Mike Coupe - Group Chief Executive

Kevin O’Byrne - Chief Financial Officer

Conference Call Participants

Bruno Monteyne - Bernstein

Andrew Gwynn - Exane BNP Paribas

Nick Coulter - Citigroup

David McCarthy - HSBC

Sreedhar Mahamkali - Macquarie

Operator

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

Mike Coupe

Good morning, everyone, and welcome to the Quarter One Sainsbury Trading Update Call. I am 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’ll hand over to you for Q&A. So, Kevin, over to you.

Kevin O’Byrne

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 the like-to-like sales down 1.6%. The contribution from new space was lower during the quarter as the pace of Argos in 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 switching trends.

We continue 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 it 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 and total sales up 1.5%, online sales up 5.1%. General merchandise sales fell by 3.1% with a reduced contribution from new space quarter-on-quarter of about 1%. Like-for-like declines were driven by weakness 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 UK's fifth largest clothing retailer by volume. Strong online growth was a contributor to this with online now accounting for nearly 80% 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 have 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 Market Day in September and we now open up the call for your questions.

Question-and-Answer Session

Operator

[Operator Instructions]

First question is from Bruno Monteyne of Bernstein. Please go ahead.

BrunoMonteyne

Hi, good morning. 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 grocery and the supermarket are down somewhere in the order of minus 1%? Just try to check if there would be ballpark right. And the second one is, are you still completely comfortable with full year consensus of underlying PBT for about €630 million. Could you please confirm you're still okay with that?

MikeCoupe

Yes. I'll ask Kevin to comment on the second. And, yes, I mean I think we'd point to Kantar/Nielsen, I'm looking at James. We are sort of measuring inflation at 1 and little bit and 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 back solve it. We do try the -- and underlying volumes are down about 1% in the grocery business.

KevinO’Byrne

And, Bruno, just on consensus, it's obviously a trading statement. We don't routinely comment on consensus particularly given we are 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 and because there were some questions this morning about the relative and comparative gets tougher in quarter two. And it's worth just looking at the two year like-for-like in that case because the previous year we had a good early summer as well. So on a two-year like-for-like the comparators in quarter two don't look as demanding.

BrunoMonteyne

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 Market 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 stores until you would say, you have a new, better improved offer in store? Are we talking by the time at the Capital Market Day in autumn, they'll be largely in the store or would be halfway. What the timeline for this repositioning, please?

MikeCoupe

So we have a pretty comprehensive program plans between now and Christmas. And as we stand today around about the third of the products are in the business, you can actually see them; you can come and pick them out from the shelf and by the time we get to the Capital Markets Day, assuming we deliver against the plan, it'll be roughly two-thirds 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 it's the twenty -- 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.

BrunoMonteyne

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

MikeCoupe

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, Deli & Bread. So there are number of brands I mean 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. Please go ahead.

AndrewGwynn

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

KevinO’Byrne

Of course, you always get very excited about short-term trading, but I won't consider--

AndrewGwynn

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

MikeCoupe

But, yes. I mean 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 a 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 that would show our relative competitiveness and we've actually won the Grocer 33 for the last two weeks on price.

So again that would suggest that our relative pricing is reasonably significantly better. But the actual entry price points account for relatively small portion of our sales, a high proportion of our volume for obvious reasons.

And as Kevin's 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 improvement in volume trend, you see/ that in the externally reported data during the course of the quarter we're 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 about the first week in August with the kind of weather and headwinds that we've talked about in the first quarter.

And after that it was pretty dreadful remainder of August and September. So who knows how that's going to play out? And what would be the big picture? We've always said that our start point would be to maintain our volume share that would 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.

AndrewGwynn

But even with that volume share, mostly there's elements of the volume which may be of worth chasing, so alcohol a little bit maybe. I mean I suppose does the trading performance at the moment really trouble you or is it just time, short term blip if you were --

MikeCoupe

Well it will be, it 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's already commented, we're comfortable with consensus and we're comfortable with what we're seeing in reaction to the changes that we've made. But we are already 1/3 way through the year so plenty of space to go.

KevinO’Byrne

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

Operator

Next question from Nick Coulter of Citi. Please go ahead.

NickCoulter

Hi. Good morning. And three if I may please. Firstly, on grocery. Can I ask about the improving volume performance in grocery that you referenced. Are you able quantify that given it must be reasonably large against backdrop of the weaker market in recent months. Then secondly on clothing. I know there are a number of promotional days are 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? Thank you so much.

MikeCoupe

Really, I'm not sure I am going to be able to answer all of those but I'll have a go. Yes, we don't quite 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/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.

NickCoulter

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

MikeCoupe

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 Market Day in September, but if you are more competitive and your store tends to be better and you are investing in parts of your offer and we're also growing as we have done in previous quarters. Our added value foods in the round, 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 150 birthday that was a great fillip for us. And broadly speaking that kind of signaled a [sea] 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 were just more of that one thing. It's whole series of things on a number of fronts. But it's undoubtedly the case that we're more competitive on price. And as I said, the fact that we've won the Grocer 33 for two weeks running now, I think that's sensitive money side in the business. So it does happen occasionally, but it doesn't happen sequentially that often.

On clothing, yes, clearly given it rained this year and it was sunny last year and 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 three or four weeks of rain it probably would start to get uncomfortable, but as we stand today, we're not at the same sell-through level evidently as we would have been last year. We're slightly behind the 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 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 a third 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 to plan, you want it now and the Argos machine is very, very good at delivering that in absence of some half decent weather that's clearly been a drag on the business.

NickCoulter

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

MikeCoupe

Up and reasonably substantially up.

NickCoulter

Thanks. That's helpful. Then last one if I may online in grocery. That's a decent clip of growth. What have you changed there? Have you changed anything in grocery home shopping?

MikeCoupe

No. I like the word decent clip. That's a good phrase. Yes, just a 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 I'm actually of the performance in the business overall, our points at our convenience stores has been pretty stellar.

On groceries online, it's pretty much continuation to 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. Please go ahead.

DavidMcCarthy

Good morning, gent. 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 and 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.

MikeCoupe

Yes. I don't think we've quoted the headline NPS score. So I am looking around me and everybody is nodding their heads 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 the improving trend and we reference the fact that on the 13 of 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 too, albeit less than we were previously.

DavidMcCarthy

Okay. So you are 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?

MikeCoupe

Maybe Kevin likes 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 frame the question; it depends on what the competition actually do relative to what we do. And 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 --

DavidMcCarthy

The implication was 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.

MikeCoupe

Yes. So -- and 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. Well, I can't tell you are what opposition may or may not do relative to that. So that's why I can't answer the question directly, but the result so far would suggest our pricing is better and that's particularly relative to the discounters, I've already referred to and our price relative to adding little, our prices relative to our being little being to 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, 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 anything you'd add Kevin?

KevinO’Byrne

I was just going to - it was just building on what you said about the Capital Markets Day. We will have more experience Dave of the work we're doing and the improving value and how customers are reacting. And the key thing will be the switching between the sort of entry price point in the mid tier and the impact and premium. We are 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 market place where you over index in the entry price point, and you lose in the premium and interest, it has a 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

The next question comes from Sreedhar Mahamkali of Macquarie. Please go ahead.

SreedharMahamkali

Yes. Good morning. 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 and 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?

MikeCoupe

Yes. There clearly 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 that the self-help of reducing costs within our business overall. And those are all things that we are doing as part of this program. Clearly, we will 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 and recovery of costs et cetera, et cetera. So we could answer better when we get to September given that we're only have 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 at all, have a lovely summer. Thank you very much. Bye-bye.

End of Q&A

Operator

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

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