Mike Coupe - CEO Kevin O'Byrne - CFO

Andrew Gwynn - Exane BNP Paribas Niamh McSherry - Deutsche Bank Research Rob Joyce - Goldman Sachs & Co. Edouard Aubin - Morgan Stanley Nick Coulter - Citi Mike Dennis - Lazarus Research

Good morning, everyone and welcome to the quarter 4 Sainsbury's trading update call. I'm joined by Kevin O'Byrne, our new CFO and I'm going to ask Kevin to walk through the quarter 4 highlights and then we'll hand over to you all for the Q&A.

Kevin.

Thanks, Mike. Good morning, everyone.

I'm delighted to be here and look forward to meeting you all at our preliminary results in May. I'll now take you through the key numbers for Sainsbury's and Argos in turn.

Turning first to Sainsbury's, we saw headline like-for-like sales decline of 0.5% over the quarter, but after adjusting for Mother's Day and the build-up to Easter, both of which will be three weeks later this year, we estimate that our like-for-like growth would have been in line with Q3 at about plus 0.1%. These timing differences impacted general merchandise sales in particular, so while we delivered good growth in clothing of plus 5% against a tough comparative, non-food overall diluted our headline growth rate.

On clothing, we were up against tough comparators, as I said, in quarter 4 last year and our two-year growth was consistent with quarter 3 at an impressive 15%. Against this, food performance was broadly unchanged quarter on quarter, with convenience and online continuing to perform well, both growing at 7%.

Consistent with market data, you'll have seen we moved from food deflation to inflation over the period and we're confident that we can continue to deal well with the cost price pressures in the market whilst remaining competitive. Turning to Argos where we've seen another good performance, with customers responding well to improvements we've made to the Argos website and app and good growth from technology products.

We now have 41 Argos stores in Sainsbury's and we continue to be very pleased with our performance. So overall, a solid performance and we're comfortable with the consensus profit expectations for the full year.

I will now open it up to questions.

Well, two questions for you first. So first one would be on profit.

I see on the wires you're broadly happy with where consensus is; around about GBP578 million of PBT. I think at the half-year stage, Edward kindly did the math for us, but the margin implicit was down about 40 basis points.

But since then, it would seem to be that Argos has probably traded ahead of expectations. So is the core food retail margin maybe a little bit worse than that sort of math that Edward did for us all?

Then just on the second question, just on Argos actually, obviously, could you elaborate a little bit more on why trading is quite so good there; and really very early stages, I know, but a little bit more detail on the integration process? Thank you.

Yes Andrew. The first comment to make is that the revised consensus moved from GBP 573 million to GBP 578 million.

Maybe if Kevin could give a bit more color on it. So the consensus has reflected some change in performance, but maybe Kevin can -

Yes Andrew. The underlying margin in the food business, we're happy with it.

There's no material change there. Consensus has ticked up a little bit and we're happy with that and the range that we guided for Argos we're happy with.

As far as the Argos performance is concerned, we never subscribed to the idea that the business was not competitive and we're pleased with what we're seeing; actually, a slight improvement in underlying sales in the quarter and actually, an outperformance to the market by a couple of percent. So the business is in good shape.

As far as the concession rollouts are concerned, we're now up to 41. If you look at the 10 that have annualized, we're seeing continuation of the 25% or so like for like, so that gives us some confidence that it's a sustainable performance.

In this quarter, it will be around 25%. We're going as fast as we possibly can.

And we've already talked to you about the fact that we're committed to moving around about 250 Argos stores into Sainsbury stores, whether they're relocations or new white spaces. So six months in, so far so good.

We're in line with if not slightly ahead of where we expected to be, so we're very pleased with where we're.

So I suppose just to summarize on the food retail business, you set out fairly cautious expectations at the first half. Those have largely played out.

Is that a fair summary?

What? As in the first half coming up or the first half last year?

Sorry. At the first half of this year, you set out this fairly cautious guidance for H2 of the year that's just finished, down 40 basis points.

That has broadly been the case. Is that--?

Yes. I think broadly speaking, we've performed in line with where we'd have expected to be in what was an incredibly uncertain and challenging marketplace.

So we're very pleased that we've managed the business in the way that we've managed the business. It gives us a lot of confidence in terms of our future prospects.

We're doing the right things. We're investing in the right areas of the business, as we've said numerous times before.

As I say, reflect on the fact that the last nine months have been probably one of the most challenging environments we've seen for a very long period of time. So in that sense, we set I think the right expectations, but also have delivered against those expectations.

I just had one question, actually. Can you tell us how many relocation Argos stores are now in place?

At the interims, you said you'd have two by Christmas and I was just wondering if you could give us a bit of an update as to the situation now and also maybe any plan that you have.

So far, we have relocated three. So again, there's nothing in the numbers which would undermine any of the case that we have already put to you.

We're pleased with the performance. We haven't specifically split out the 250 stores simply because it's important for us that we talk to our colleagues in stores before we talk to the outside world.

So we haven't broken down the ratio of that 250 to relocations compared with white spaces. But again, I'll reinforce what I've already said.

We'll go as quickly as we possibly can. We're 41 down and counting which is pretty good going.

We think we're going to get to at least another 25 in the next quarter and we'll update you more fully when we get to the prelims with a bit more color around the plans because we'll have a few more months of experience by then.

A couple of questions from me. So firstly, just on the grocery volumes in store.

We've got Kantar inflation which suggests maybe volumes falling in grocery around 1% to 2% in the stores. Why do you think that the volumes have fallen so quickly in the face of what is still pretty low inflation in the market?

And how do you think about offsetting this in the months to come as inflation pressures rise? And the second one was just on Argos and the general non-food market, actually.

Can you give us a feel for the levels of price inflation you're seeing in the non-food market as a whole and how volumes have responded to where you've seen inflation come through? Thanks very much.

Yes. This is a short period of time.

So it is only nine weeks and it's very heavily distorted or distorted by the effect of Easter and Mother's Day. So we have to be slightly careful to read too much into the numbers.

And, of course, for the first time in quite a while we've seen a negative impact of our general merchandise business because of the timing of Easter and Mother's Day. So broadly speaking, the underlying food volumes are in line with the previous couple of quarters, so I'm not sure there's a lot of news in that.

And, of course, I'd point at all the things that we do in our business to offset any challenges in the marketplace. We have to be price competitive and we continue to believe we're price competitive.

All of the market data would suggest there's inflation in the market overall, but also in our competitive set. We must invest in quality of the products and services that we offer.

We continue, we believe, to run the best shops and I think that's borne out by a large amount of market data. And we continue to invest in the growth areas, whether that's online, convenience or our general merchandise and clothing business.

As far as inflation in non-food is concerned, well, headline 4.3% like for like. We had volume growth in Argos.

We outperformed the market by a couple of percent. So you can have a go at back-solving the arithmetic, but you can draw your own conclusions in terms of the level of inflation in the Argos business.

It's positive, albeit against a backdrop of positive volume growth.

And when we look forward, do you see that inflation meaningfully having to step up? I think, Argos, previously you said hedges were 12-month rolling.

Yes. We live in uncertain times and it's very, very difficult.

And I know it sounds a slightly glib answer; it's very difficult to predict what's going to happen going forward. If you think about the last nine months, we've been through an unprecedented series of challenges and I think it's a testament to the competition in the marketplace and also the great job that we've done in terms of mitigating cost price pressures and the impact on our customers that we haven't seen inflation coming through anything like the levels that were predicted at the time of Brexit.

So it's important for us to remain competitive, but equally, you take fuel as a very obvious example, it went up on the back of the Brexit vote because of exchange rate differences. And then we've seen more recently the price of oil fall and we've seen this week that people are announcing that there are price cuts coming through.

So there's a lot of volatility out there; very difficult to predict what's going to be happening in the future.

Just, Mike, sorry to come back on inflation, but I think last quarter you mentioned that deflation, basket inflation was around 0.5% and 1% the quarter before that. So what numbers should we be thinking about for Q4?

Is it anywhere between 0% and 1%? Would that make sense in terms of an estimate?

Well, we would acknowledge that we've gone from as we entered the quarter deflation, as we exit the quarter inflation. The numbers are distorted by the timing of Easter and Mother's Day and it is a very short quarter.

So we're not picking out a specific number. I would just point you at the market data that's already out there, whether it's Nielsen, Kantar or ONS, all of which paint a similar picture; would describe the levels of inflation in the marketplace and also the fact that it's being experienced in all of the major grocers.

So I think, that's just generally the rising tide that you're beginning to see.

Right. But if you extrapolate the Kantar implied inflation just for the month of February, I think that implies around 2%, above 2% inflation.

Is that the number you think makes sense or that that would be overestimating inflation in February?

I won't get drawn on the specific number. Directionally, as I've said, we've seen the line of travel from negative, from deflationary to being inflationary.

I'm not going to comment specifically on the number; just acknowledge the fact that I think you see market data out there, Kantar and Nielsen, ONS, say slightly different things, but broadly speaking, point in the same direction.

Two questions from me, if I may. Firstly, given the complications of mix in quite a short period, could you or would you confirm that the like-for-like grocery volume trends are a small negative and then an update on your initiatives to drive a better trajectory?

And then secondly on Argos, could you elaborate on your Retail Week conference comments? I think you said that the synergies are coming through faster, but it would be interesting to hear you reiterate or discuss your comments there.

Thank you.

Yes. I'll say what I said earlier that broadly speaking, the food volumes are in the same position they were in the last two quarters, so slightly negative and we continue to do what we believe to be the right things to mitigate that.

Our job is to do a better job for our customers, improve the quality of the products that we sell, invest in the channels for growth like convenience which grew by 7% and online which also grew by 7%. I didn't actually say what was quoted.

What I said was first of all that we're confident that we can deliver the Argos synergies - I'm just repeating what I said numerous times before - and if we could, we would accelerate them and do it faster. But I didn't actually say we would.

So I have to be slightly careful in what I say but we're confident we'll deliver the Argos synergies. And I think if you go back to the transcript, what was reported is not what I actually said.

We'll re-watch. Thank you.

Okay. And we'll talk.

This is a trading update. It's a very short period of time.

We'll clearly give you more color when we get to the prelims in seven or eight weeks' time.

There're very solid plans behind the synergy work.

I wanted to ask you a question about growth between own-label and branded goods within this trading period and obviously coming out of the second half, so the whole of the second half period. Have you seen more recently with fuel price increases more people trading down into own label?

And could you give us an idea of what own label is doing in terms of growth year on year?

Yes. The first thing to comment on is we already have a pretty high own-label penetration compared to our mainstream competitors and broadly speaking, the participation of own label has stayed flat over the year.

So I'm not sure there's anything I could particularly pick out. I've made the comment before that if we see any squeeze on household incomes, that's usually beneficial to supermarket chains because people start to eat in a little bit more and when they eat in, they tend to buy nicer stuff.

In the past - and that's not necessarily an indication to the future, but in the past, we've seen stronger growth in areas like Taste the Difference when we've seen these kind of dynamics. But I've said already, it's very, very difficult to predict how the future will play out.

We've been through a very interesting period of time over the last year and we think we've done a pretty good job of managing our way through that.

Is there anything within that in terms of growth between basics and Taste the Difference? Is there anything in particular in the trading?

Well, we've tended to do better in areas where we've invested in quality. So if you look at the overall trends, we re-launched our On the Go range pre-Christmas.

That's doing well. We re-launched our Freefrom range.

That's doing well. So in areas of added value fresh foods, we're tending to do better where we've added quality and where we've added value.

But as I say, in terms of the overall mix, broadly speaking, our own-label participation is where it was this time last year. There aren't any meaningful movements one way or the other.

Okay. And on another thing, just looking at your new store openings and the mix between the food business and convenience and supermarkets, could you give us an indication of how fast your convenience store business is growing now.

Is that still growing in line with the market or ahead?

Headline level, the convenience business grew by 7%. There's actually a strong underlying like for like as well so a pretty pleasing performance in the quarter.

We're now at over 800 convenience shops. I can't remember the exact number in terms of -

We opened 10 shops in the quarter 799 shops in total.

806 shops.

That's excluding the Euro Garages.

Yes. And we've opened the Euro Garages franchises as well.

So we've again said we're only going to invest in convenience stores where we can make the right returns. We're not going to be driven by a number.

And that seems to be working its way through pretty well. So pleased with that performance and, of course, it plays to the changing shape of our business.

Our online grocery business is up 20% year on year; convenience up 7% plus I think 6% the previous year, so not far off 15% over the two years. And that shows the way that the market is changing.

Okay. And while I've got the mic, what about the online business?

You talked about that in terms of trends obviously getting better, but how are you seeing that market? Obviously, the whole market is growing at a lot slower rate in terms of online growth.

Yes. As I said, we grew our - or we have grown our online grocery business by 20% year on year - sorry, over two years; 7% year on year in this quarter.

So we're pleased with that performance. We've said consistently now we're not going to chase volume for the sake of chasing volume.

For us, it's about building sustainable business which serves Sainsbury's customers brilliantly well. Examples of that, we've now integrated our homemade recipe site with our grocery online site, so when you click on a recipe you can download the ingredients automatically into your shopping list.

Something like 25% of transactions are now amended or ordered using our online grocery app. And, of course, we shouldn't forget that the Argos business itself is now pushing towards 60% initiated online or on mobile phone.

So that business is to all intents and purposes an online business. So in the previous quarter, online sales accounted for 18% of the Company's overall turnover, so you can see that the business is very rapidly moving in that direction.

Hey, Rob, you've had one already.

Yes. I didn't want Mr.

Gwynn to go home disappointed so I'll have to throw an inflation one in there for you.

I thought we had answered that one already.

Well, maybe you can tell me - it's just been answered, but I was going to say as you sit here now, do you see input cost inflation being fully passed to the consumer in your own business and the industry? And how have you mitigated it thus far, because it's been inflationary on the input side for quite a while?

Yes. I guess I'll end up repeating what I've already said.

I think the first thing to say is that we have done and you could argue the market more generally has done a remarkable job considering the input price pressures in mitigating within supply chain. So that means looking at sources, making sure we're buying from places which are competitively priced, working hard with our suppliers to look for ways to mitigate cost price increases and making sure that we look at our own business.

And if you look at our record of delivering cost savings, we've done a pretty good job in the last couple of years of delivering cost savings as well. So all of those things mean that we have been able pretty largely to mitigate any of the cost price pressures in the marketplace whilst acknowledging the fact that we have seen food price inflation return for the first time in two and a half years.

We'll continue to do all of those things. Equally, we live in an uncertain world.

So commodity prices, currency fluctuations will impact pricing going forward and we just have to keep doing what we've been doing in the last period of time. But I guess having been through the last nine months of quite a lot of volatility, we're confident that we can manage whatever comes our way over the next period of time.

Okay. Thank you for repeating that.

It's okay. Don't worry.

Good. I think we haven't quite broken our record, but thank you very much for coming on this morning.

We will see you all no doubt at the prelim announcement in the early part of May and if not in between times, we may not see you and I'm sure Kevin will be out talking to some if not all of you over the next period of time as well. Thank you very much for coming on.