Shares in Sainsbury’s [SBRY] climbed back 4% to above 231p on Wednesday as investors rewarded the supermarket chain for growth in underlying profits and a boost to cash flow in the year to 9 March. But the ghost of the aborted merger with Walmart-owned [WMT] Asda hung over management as earnings revealed a £46m charge stemming from the takeover flop.Sainsbury's 1-year share price performance, CMC Markets, 02 May 2019
Underlying profits before tax grew by 7.8% to £635m, while reported revenues rose by 1.9% to £29bn. But earnings were down by 29% to £219m overall due to a flurry of charges that included restructuring expenses within Argos and Sainsbury’s Bank and – most damningly for CEO Mike Coupe – costs incurred in preparation of the failed Asda tie-up.
Sainsbury’s said last summer that it had arranged a £3.5bn syndicated loan and a £550m increase to revolving credit facilities in order to back the £7.3bn acquisition of the Walmart subsidiary. But the bid was shot down by the UK’s Competition and Markets Authority (CMA), which issued its first negative opinion in February – knocking 18% off Sainsbury’s shares in one day – and then ultimately blocked the deal on 25 April, almost a year to the day since news of the merger first broke.
|PE ratio (TTM)||19.42|
Sainsbury's stock vitals, Yahoo finance, 02 May 2019
“If it hadn’t been for the collapse of the Asda merger, we might have been talking about a strong set of financial figures from Sainsbury’s,” said John Moore, senior investment manager at Brewin Dolphin. “As it is, much of the focus will be on what could have been and where the business goes from here.”
CEO Mike Coupe – who last week reacted bitterly to the CMA’s ruling, saying in a statement that it was “effectively taking £1bn out of customers’ pockets” – on Wednesday denied that he had any intention of resigning, and said he would invest in improving stores and cut prices. “We can and will invest in making our core commodities more competitive,” he told reporters. “Clearly it will take longer than if the Asda transaction had gone through.”
“We can and will invest in making our core commodities more competitive” - CEO Mike Coupe
But the Asda affair badly tarnished Coupe’s reputation in analysts’ eyes. “The merger never looked like it would pass the CMA’s tests, however fickle the regulator may seem post [the 2018] Tesco-Booker [merger],” wrote Markets.com chief analyst Neil Wilson, calling the CEO’s claim that the tie-up would bring down prices “absurdly disingenuous”. Shore Capital’s Clive Black accused both companies of “arrogance and naivety”, adding that Sainsbury’s should focus on “the art of good shopkeeping”.
Coupe declared a dividend of 7.9p following the results’ publication. However, that won’t repay shareholders after the Asda fiasco: the payout brings total dividends since the merger saga began to 18.1p per share, but share price is down 30p from 27 April 2018.