Having seen their plans to merge with Asda fall foul of UK regulators in April, Sainsbury’s management need to outline a clear vision of how they plan to move the business forward from here.
The failure to push the deal through was certainly a blow to CEO Mike Coupe. While he has every reason to feel aggrieved by the actions of the regulator, who it would appear don’t understand how competition works, he needs to move the business on, particularly since the Sainsbury's share price has fallen to 30-year lows. Further declines could see it run the risk of being relegated from the FTSE 100 for the first time in its history.
This morning's Q1 results
Mike Coupe can start with this morning’s latest Q1 update, which showed that sales declined significantly from the levels we saw a year ago, where they were boosted by the Prince Harry's royal wedding and the start of the football world cup. This would help explain why we saw a big decline of 3.1% in general merchandising and 4.5% in clothing, coming in much worse than markets were expecting. Market expectations were for a decline of 1.5% in general merchandise and 2.5% in clothing, while food was expected to fall by about 1%.
Grocery sales, which make up the bulk of the business did come in slightly better, with a decline of 0.5%, but there is no escaping the fact that these numbers are disappointing, and they raise a number of awkward questions for senior management and the stewardship of CEO Mike Coupe. They certainly aren’t in the money now, and investors will be entitled to ask some difficult questions at the AGM tomorrow.
In terms of dealing with the day-to-day challenges of a weak economic environment, Tesco is already well ahead of the game in cutting adrift underperforming parts of its business and perhaps there is a case for Sainsbury’s needing to consider doing the same. In May Tesco took the decision to explore the sale of its mortgage business, thus pulling out of financial services, where net interest margins have shrunk quite sharply.
Sainsbury's share price: how to improve
There could be a case for Sainsbury's needing to consider similar radical action if profits in the business continue to underperform. Operating profits here declined to £31m at the end of last year, despite the business adding new customers, which suggests that further cuts in the cost base may be required, given possible overlaps between Argos Financial Services and Sainsbury’s Bank. The company also has a host of improvements and investments planned in terms of digital; however, the question is whether these are going to be enough to turn things around?
New chairman Martin Scicluna is likely to get a baptism by fire from disgruntled shareholders at tomorrow’s AGM over his decision to back Mike Coupe as CEO, and in particular could face some tough questions over the levels of pay. After today’s trading statement, Mr Coupe can expect to come under fire for accepting a bonus when the Sainsbury's share price is at a 30-year low, and the supermarket is struggling to stem a decline in market share.
The £3.9m pay package will need to be voted through by shareholders and it would be hugely embarrassing if a significant number were to vote against it.
Having courted controversy for humming “We’re in the money” in the aftermath of the announcement of the Asda deal, Mr Coupe may well have changed his tune, singing for his supper tomorrow.
View our Sainsbury's Q1 results preview article.
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