Market tastes the difference at Sainsbury's

After disappointing trading updates recently from supermarket colossi Tesco and Morrisons the market could taste the difference in Sainsbury's figures, which did not disappoint.

Underlying profit before tax in the 52 weeks to March 17th was up 7.1% to £712m from £665m the year before, pretty much in line with market expectations.

Total sales including value added tax (VAT) were up 6.8% to £24,511m from £22,943m the year before. With fuel sales stripped out, revenue rose 4.6% year-on-year (y/y), with like-for-like sales up 2.1% y/y. The group is expecting LFL sales growth in the current fiscal year to be similar to that achieved last year.

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Sales excluding VAT but including fuel rose 5.6% to £22,294m from £21,102m the year before, and a tad below the £22,375m broker Charles Stanley had been expecting.

With Morrisons recently announcing its first LFL sales decline since 2005 and sector leader Tesco unveiling its first LFL sales reverse in decades, the group was justified in crowing about its out-performance of the market which has seen its UK market share rise to 16.6%, its highest in nearly a decade; on the other hand, it is worth noting that all of Sainsbury's sales barely tops what Tesco takes at the tills overseas.

Underlying basic earnings per share climbed 6.0% to 28.1p from 26.5p the year before, paving the way for a more generous than expected 6.6% increase in the full year dividend to 16.1p, up from 15.1p and ahead of the 15.7p predicted by the market.

The board plans to increase the dividend each year and now intends to build cover to two times over the medium term from its current level of 1.75 times earnings per share.

There had been concerns that the company would be obliged to rein in dividend increases if it carried on with its breakneck pace of expanding floor-space, but instead the group has opted to slow down expansion after a period of rapid expansion.

The group achieved its target of opening 1.4m square feet (gross) of new space during the year, across 19 new supermarkets, 28 extensions and 73 convenience stores, as a result of which its property portfolio is now valued at £11.2bn, but having delivered the promised acceleration in space growth over the last three years or so, the company will now return to space growth of around 5% a year. This will reduce capital expenditure and improve cash flow and overall returns, as sales from these new stores mature. Capital expenditure in fiscal 2011/12 was £1.2bn, and is set to drop to £1.0bn in the current fiscal year.

With Tesco also reining back its expansion plans, this could represent a slowing down of the colonisation of Britain by supermarket chains.

"Whilst the wider economic situation remains uncertain, we remain confident that our clear strategy, market insight and strong values will enable us to make further progress both in our core food and non-food businesses, as well as new channels and services in the year ahead," said Justin King, Chief Executive of Sainsbury.

Net debt at the end of the reporting period had risen to £1,980m from £1,814m a year earlier, in line with the company's expectations.

The shares peaked at 310.9p shortly after 09:00, up from 301.3p overnight, before easing back.

JH