JSNSF - J Sainsbury PLC (JSNSF) Q2 2024 Earnings Call Transcript

2023-11-04 17:33:01 ET

J Sainsbury PLC (JSNSF)

Q2 2024 Earnings Conference Call

November 02, 2023, 05:00 ET

Company Participants

Simon Roberts - CEO

Blathnaid Bergin - CFO

Conference Call Participants

Frederick Wild - Jefferies

Andrew Gwynn - BNP Paribas Exane

Izabel Dobreva - Morgan Stanley

James Anstead - Barclays Bank

Clive Black - Shore Capital Group

Nick Coulter - Citigroup

David Roux - Bank of America Merrill Lynch

William Woods - Sanford C. Bernstein & Co.

Sreedhar Mahamkali - UBS

Presentation

Simon Roberts

Good morning, everyone, and welcome to our '23-'24 Interim Results Presentation. Thank you for joining us today.

Now, I'm going to start with a brief introduction to cover progress against the priorities we set out 3 years ago in our Food First plan. Blathnaid is here with me, and she will then cover the financials, and then I'll go into more detail on some of the strategic highlights from the first half.

Now, you will hopefully recognize our 5 priorities that we set out 3 years ago now back in November 2020. Since then, we have talked to you many times about the key pillars of Food First, brands that deliver and Save to Invest, underpinned by being connected to our customers and delivering through our integrated Plan for Better.

Now, we've made strong progress, reigniting our passion for food, building resilience in our brands that deliver and making bold choices to reduce our cost base. And this has provided us with the feel to invest in our food offer, improving service, innovation and particularly, value. I'm pleased to say that our relentless focus driving these improvements has delivered, with food now firmly back at the heart of Sainsbury's. We're consistently delivering for customers on value, innovation and service and they are noticing.

Now as a result, we've seen a significant shift in our market share momentum and we've grown grocery volumes ahead of the market consistently since the start of the financial year. You can really see our progress here in the switching data, which shows volume gains and losses between different retailers. We are now gaining volumes from all of our grocery competitors and we're the only full-choice supermarket to be gaining volume from both Aldi and Lidl.

Now, of course, a big driver of this is the meaningful improvement in our value proposition. We said at the start of the strategy that we weren't where we needed to be on price. Quite simply, customers wanted to shop at Sainsbury's, but back then, we were too expensive. Through the significant investment we have made in value, our Price Match to Aldi, the introduction of Nectar Prices across the basket and through continuously passing through less inflation than our key competitors, we are now at our most competitive on price. And customers are depending on us and are trusting us to deliver consistently great value.

Now, that consistency really shows through here. An update of the chart we have shown you previously demonstrating our progress from November 2020 up to now. And the outcome as you can see is clear. We have improved our value position against all of our key competitors. The investments we have made across our food proposition are really being noticed by our customers. And as a result, they are rating us more highly. We have consistently outperformed on overall customer satisfaction. But what you can see here is the progress we've made and how we show up for our customers across the full spectrum of the metrics that are really important to them.

Now, we are particularly encouraged by the progress we've made so far this year on improving our value perception, a measure which you will all know is notoriously slow to move. Now, alongside our progress in food, we've transformed Argos into a fundamentally more resilient, profitable business and a leading digital retailer.

When we talked with you at our quarter 1 results in July, we flagged the tough comparatives that Argos faced this year after an exceptional summer last year. At the time, we were optimistic about the weather for summer 2023. But as you all know, unfortunately, the weather over the summer didn't go our way. And as a result, we saw significantly weaker sales across the higher margin seasonal categories.

Just to give you some examples. In the second quarter, paddling pool sales were down 74% year-on-year. Barbecue sales were down 46%, and garden furniture sales were down . However, we continued to outperform strongly in the key electronics categories, with strong market share gains as customers have responded well to our improved availability and a greater range of more premium products. And just as an indication of the significant change in customer behavior we saw this summer, gaming sales were up 20%. So, while we took a hit on the top line and on gross margin mix, Argos continues to become a more efficient business, reducing the fixed cost base and therefore, limiting the impact of revenue and mix shifts on the bottom line.

Now before I hand over to Blathnaid on the financials, I want to reflect on the 8 key operational and financial metrics that we set out 3 years ago. I committed back in November 2020 that we would report on our progress every time we updated you. So as we look at the operational metrics, I'm really confident in the progress we have made and in the strength of our delivery.

Our momentum is continuing to build. We've made record gains in grocery market share. Our customer satisfaction scores show that our customers are recognizing the improvements we've made. Significant progress, too, in our colleague engagement and that's really helping to power our performance. And we're working hard on our plan for better objectives, making good progress in some key areas of our plan, but recognizing too there is still more work for us to do and others.

Now on the financial metrics. As we look ahead, we expect our strong momentum to continue. We've upgraded our profit guidance today despite the headwinds caused by a tough summer in our general merchandise and clothing businesses and with the reduction in financial services profits.

Our group UPBT is significantly higher than it was at the outset of the strategy despite significant investment in the customer offer. And we're on track to deliver the £1.3 billion of structural cost savings, the quantum associated with our original target of 200 basis points cost of sales reduction and more than double the savings run rate of the prior 3 years.

We've increased our guidance on the amount of retail free cash flow we will generate. And as a team, we remain very focused on driving further improvements in returns, both in terms of capital discipline and profit evolution. This will be one of the key focus areas we'll talk about more when we get together in February, as we look ahead towards the next phase of our strategy.

So, we've made a strong start to the year and we're encouraged by the continued momentum we're carrying into the second half. I want to recognize every one of my colleagues and all of our supplier partners. They are continuing to do a brilliant job, driving forward our progress and enabling our success. Huge thanks go to all our team for all they're doing every day to deliver for our customers.

And with that, I'll now hand over to Blathnaid to cover the financials.

Blathnaid Bergin

Good morning, everyone, and thank you, Simon. I will now cover the financial highlights for the 28 weeks to 16 September. Covering sales first. Grocery sales increased 10.1% in the half, with volume growth in both Q1 and Q2 despite tough comparatives. This was against last year's very warm summer weather and strong events performance.

Growth eased a little in the second half as inflation slowed. General merchandise sales grew 1.1% or 2.5%, excluding the closure of Argos in the Republic of Ireland. Sales of outdoor and seasonal products were down more than 30% in the second quarter, reflective of a very poor summer weather. This was offset by market share gains and strong sales growth in electricals, with Argos Q2 sales down just 0.1%.

Weather also impacted clothing sales, where we took a disciplined promotional stance. This had a significant impact on seasonal impulse purchases in a highly promotional market. In total, H1 retail sales, excluding fuel, were up 7.7% year-on year, or 8.4% on a like-for-like basis. Including the impact of lower fuel sales primarily reflecting lower prices, first half sales growth was 2.6%.

Turning to the key profit numbers. Retail operation profit was up just under 2%, with strong profit growth in grocery, partially offset by the mix impact on general merchandise gross margins as a result of lower seasonal sales. Financial services profits fell primarily due to lower net interest income. After slightly higher underlying net interest costs, underlying profit before tax was flat year-on-year. At a statutory pre-tax level, we reported a profit of £275 million. This is down £101 million against the prior year. Within this, restructuring costs were broadly unchanged year-on year, and I'll cover the key movements behind this shortly.

Looking at the balance sheet. Net debt including leases reduced by over £700 million from the year end. In addition to our strong cash flow, this reflects a net benefit of £372 million from the completion of the Highbury & Dragon property transaction. As a reminder, we bought 21 of our best supermarkets back from a property investment pool, which we part owned. This transaction completed earlier in the year, removing lease liabilities of just over £1 billion.

The net cash costs of the transaction was £670 million. We funded this with cash and a term loan, and this is reflected in the movement of ex-lease debt position from net funds of £144 million to net debt of £231 million. Net debt-to-EBITDA reduced to 2.6x, reflecting 3 things; the impact of Highbury & Dragon transaction on net debt, continued strong cash generation and as normally the case, a strong seasonal working capital benefit, which we would expect to partially unwind in the second half.

You can see our return on capital employed improved to 7.9% from 7.7% at H1 last year, primarily driven by our continued focus on debt reduction. We generated £520 million of retail free cash flow in the half, a strong performance, but this is down versus last year's exceptional level. We benefited from 3 things. First, strong working capital inflow driven by the seasonal timing benefit mentioned earlier. Secondly, grocery inflation and finally, strong stock control. The reduction in underlying earnings per share after flat pre-tax profit is driven by the increase in the rate of corporation tax. We will pay a dividend of 3.9p per share, in line with last year and with our practice of paying 30% of prior year's full dividend.

Turning to financial services. Underlying profit was down £6 million year-on-year. Revenue growth was strong, driven by lending growth and Travel Money commissions. You can see net interest income reduced as the impact of significantly higher base rates on funding costs was not fully passed on to consumers. This reflects both the market dynamics, together with the nature of the products we have, specifically buy now pay later at Argos, a really important part of the Argos proposition.

We also continue to see a high proportion of both credit card and Argus card customers continuing to clear balances rather than incurring interest costs. Ultimately, it's a high-quality credit book with the low bad debt ratios been an indicator of this. However, this provides a margin squeeze in the current circumstances. We completed the sale of the mortgage book during the period, reducing net lending by £449 million. The impact on total consumer lending was partially offset by growth in unsecured lending. We are focused on optimizing the lending portfolio and on cost reduction, but we now expect financial services profits to be lower than last year's levels.

Returning to the group P&L. In order to provide a clearer view, we exclude P&L items, which do not reflect the group's underlying performance. These are outlined on this slide. Restructuring costs of £32 million related to the program announced in November 2020. Our guidance for the total restructuring charges for this program is unchanged. To date, the cost of the program have been £778 million, with cash costs of £243 million. We expect a related cash outflow of around £20 million in the second half, which would mean total cash costs of a little more than £260 million through to the end of this financial year. The remainder of the one-off costs are primarily non-cash, including a loss on the disposal of the mortgage book, a year-on-year change in the movement of energy derivatives positions and non-cash movements relating to the Highbury & Dragon property transaction.

Now on to debt and cash. This table shows the key elements of the cash flow and movements in net debt this year and last. There are 3 main drivers of the differences in retail free cash flow, specifically the lower working capital inflow, higher CapExes guided and last year's dividend of £50 million from Sainsbury's Bank that we don't expect to repeat. We have broken out the elements of the Highbury & Dragon transaction for you here. We continue to expect full-year CapEx of between £750 million and £800 million. And we now expect free cash flow of at least £600 million this year, higher than our original guidance of at least £500 million.

Just a quick reminder of our capital allocation framework. As outlined before, the cornerstone is targeting a solid investment-grade balance sheet through leverage comfortably within the range of 2.4x to 3x. We then commit to paying a strong dividend to shareholders through a payout ratio of around 60% of underlying earnings. We then look to invest in high-returning opportunities that generate future value. And finally, we are committed to return any surplus cash to shareholders. As we've said before, we will talk about this once we are comfortably within our target leverage range and we will provide an update in February.

We are pleased with the performance delivered in the first half, with strong grocery volume growth, good cost discipline, strong cash generation and resilient profits despite seasonal headwinds and cost pressures. So while financial services is a headwind for us this year, we're confident of delivering underlying profit before tax of between £670 million and £700 million, the top end of our guidance range. Cash generation continues to be strong, and we now expect to generate retail free cash flow of at least £600 million for the full year. Thank you for your time.

And I'll now hand back to Simon to cover the strategic highlights in more detail.

Simon Roberts

Thank you, Blathnaid. I'm now going to review in some more detail the progress we've made during the first half of this financial year. But first, I'm going to share with you a brief film, which really does set out our bold ambition in food, to deliver good food for all of us.

Now as I hope you can tell, this is galvanizing our entire team as we work towards the next stage of our ambitions for food at Sainsbury's. It is testament to the energy we've collectively put into our Food First plan, the passion we now have again for the food that we sell and the joy for food that we want to inspire in all of our customers. So as I hope you can tell, we think we have a lot further to go with our ambition here. Now as I've told you earlier this morning, our Food First plan is delivering. And you can see that in our volume performance against the market. The next few charts really demonstrate what's driving that outperformance.

We're growing customer numbers faster than our competitors, and secondary customers have been a key part of that. We said back in 2020 that we were underperforming with secondary customers, and it was probably the clearest indicator of a price position that needed improving. As those customers, far more than was the case with competitors, were buying a few items at Sainsbury's, but not trusting our prices to do more of their shop with us.

So by focusing on our investment on key center of plate items and consistently delivering better value for customers on the products that they buy most often, we're now seeing more and more customers shopping with us across the full basket. And trusting us for those big mission shops, too, not just popping in for a few items on their way home, but choosing our supermarkets as the destination for doing their bigger shop for the full week. For over 2 years now, we've consistently inflated month in, month out behind key competitors. So, we're delivering improvement on improvement.

The chart shows some big recent swings from some competitors, but what really marks us out, as we said before, is the consistency of our position, and this is what our customers are recognizing. We have a unique value proposition in the UK market across Aldi Price Match, Price Lock and personalized pricing through Your Nectar Prices. And then in April of this year, we launched Nectar Prices, discounts for everyone across our supermarkets and grocery online.

We rolled out Nectar Prices at pace in a well-executed launch that saw us really connect with customers and deliver end-to-end across the business. We now have more than 6,000 products available on Nectar Prices, and customers have already saved over £450 million since April, and they're saving on average nearly £10 on an £80 weekly shop. The customer response has exceeded our expectations, with the vast majority of customers now shopping Nectar Prices and more than 3 million new customers signing up to Digital Nectar since launch. We are excited to have just this week launch Your Nectar Prices, our personalized discounts on grocers online just in time for this Christmas. And we're looking forward to hearing how our customers find this addition to their online shopping experience.

Now, you've heard me talk about the step change we've delivered in terms of innovation. And I'm really encouraged to see our performance in premium own label volume growth against all competitors during the first half of this year. We launched almost 600 new products in the half, with more than 70% of those in fresh food, and we have refreshed all of our Taste the Difference packaging with much improved product descriptions and visual impact.

As you know, we have been deliberate in our focus to win the big events, but customers are also choosing us more often for other dining in at-home occasions, driving stronger Taste the Difference performance over the summer with volume growth in the second quarter of 8.4%. We also launched a new high-quality convenience food offer of premium sandwiches, salads and deli meals in supermarkets and convenience stores called Kitchen Deli, and we are rolling out new displays to the backwalls of many stores with Kitchen Deli and enhance our charcuterie and cheese displays, replacing some of the closed counter space. And we're stretching the offer further for this Christmas with our ambitious product innovation, including more than 170 new Christmas Taste the Difference products this year, such as our Slow cooked turkey crown, our Bao's of Holly and our Tipsy Toffee Pies, which I have to say, taste amazing.

Our plans and innovation also extend into our Plan for Better and the work we're doing to support British farming for the future. After a decade of development, we have launched our new Taste the Difference Aberdeen Angus beef range. We are revolutionizing beef production, reducing carbon through superior cattle breeding to offer to our customers the largest lower carbon beef range in the UK, with a 25% lower carbon footprint than industry standard and at the same time, we're giving greater security and stability to our farmers through the way that we pay.

Now this is an industry first. Through this range, we are now delivering much improved customer, producer and sustainability outcomes. We also announced during the half an additional £6 million of support for dairy farmers, recognizing the need for continuous investment in the sector to support them through rising costs and help provide the necessary certainty and investment for making greater progress towards sustainability goals. And most recently, we won the Marine Stewardship Council UK Supermarket of the Year and Aquaculture Stewardship Council UK Retailer of the Year titles, the first time a major retailer has won both awards.

Now as well as supporting our suppliers, we continue to put our people first. We have invested significantly in colleague pay and have extended our increased colleague discounts and free food during shifts indefinitely. Now, I'm greatly encouraged by the further progress we've made in our colleague engagement as you can see here. And we know that this is driving lower absence and improved retention, too.

At our year-end results in April, I shared that our colleagues were at the very heart of delivering our future success and delivering more for all of our stakeholders. It's our strong belief that higher colleague engagement drives greater productivity as you can see here, and most importantly, better customer service. And you can see that coming through here on this slide, we continue to outperform on overall customer satisfaction in our supermarkets. We have also improved our convenience customer service scores during the half by 6 percentage points year-on-year. And a really sharp focus on improving the online customer experience has led us to move ahead of our competitors in quarter 2.

Now, this has been driven by our focus on greater levels of service and efficiency in online. We have steered clear of additional sales driving activity, and are focused instead on improving the offer and reliability for our online customers. And you can see that this focus is paying off, with improvements across the range of customer service metrics and continued productivity improvements.

So turning now to our Brands that Deliver. Remember, our commitment here is to build more resilient businesses profitable in their own right and supporting the core food business. So starting with Nectar, where we're well on track to deliver the incremental £90 million of profit contribution that we've targeted, powered by our rapidly expanding digital customer base. Nectar360 remains at the forefront of retail media innovation in the UK, delivering high-returning solutions for suppliers.

We've recently announced plans to build Sainsbury's Live, one of the UK's largest network of digital screens in supermarkets, extending the reach we can offer to our hundreds of brand partners. Argos continues to gain market share with its leading digital-first proposition, unmatched convenience for customers through same-day delivery to more postcodes than anyone else in the market and a network of more than 1,100 points of presence where customers can collect their orders. And we've continued to improve the customer experience in the first half with clearer visibility of range availability, and an e-mail me went-back-in-stock option, delivering improved conversion rates.

We're also getting more and more support from key suppliers, helping drive market share and expand our range of higher ticket more premium brands and products. Our 2 clothing business had a tough summer, with impulse purchases down significantly as a result of poor weather in July and August and a particularly warm early September. Perhaps most importantly, though, a key consequence of the weather was the high levels of discounting and promotions across the market.

Now, we deliberately stayed away from this. Hence, we saw a disproportionate impact on volumes relative to the market, but good stock control and limited profit downside. Also, we know our ranges in women's wear weren't quite on point this year. But as we regularly refresh our offer, we expect to see improvements coming through soon. But all-in, this is not a big issue for us, and sales momentum has improved considerably over the last 4 weeks as the weather has normalized.

Save to Invest sits at the heart of our Food First strategy, simplifying the business, making it more efficient and reinvesting the benefits where it matters most to our customers. We've now delivered £1.1 billion of cost savings since March 2021, and we're on track to deliver our target of £1.3 billion of savings by the end of this year, double the prior run rate. During the first half, we've started work on migrating to a new, more efficient and consolidated network of data centers. And we've launched a completely new way of working with partners across our logistics operations.

We've also begun work on end-to-end redesign of product flows in food and general merchandise to reduce costs. And we've continued to reduce the fixed cost base of Argos and its network. Now while many of these projects will be delivering over multiple years, we're not stopping there, with significant work also underway on end-to-end programs and unlocking structural cost reductions through investment in automation, machine learning and robotics. We will cover more on these opportunities as we look ahead at our strategy update in February.

Now in February, we will reflect on where we are as we look to the next phase of our strategy. The short answer is that we are a fundamentally stronger business than we were 3 years ago, with a significantly improved customer proposition, great momentum with customers and a far more resilient profit base. But we are also consistently proving to ourselves that having fixed a lot of the basics, we have a lot more potential to deliver. Every time we challenge ourselves on where the ceiling is, we find that we can stretch further and find more upside. We know that we can keep building on this stronger platform for growth that we now have. And the team and I look forward to covering much more on this with you early next year.

And so with just over 50 days to go, we're carrying fantastic momentum into this peak trading season. We have bold and ambitious plans to deliver another strong Christmas performance. Our value position is the strongest it has ever been relative to our competitors. We'll be bringing Nectar Prices to customers this Christmas for the first time, and we've really pushed the boat out on innovation too. This means that our customers really can treat themselves and at great prices.

Argos is also really well set up to deliver for customers this Christmas. Investment in our website continues to make shopping easier and faster. Our ranges and availability are better than ever. And we now have Argos stores in 431 of our 596 supermarkets, and more and more customers are recognizing the convenience of Argos inside Sainsbury's. And perhaps most important, we go into this peak trading period very well set up operationally and ready to really deliver for customers and provide outstanding customer service.

Thanks for listening and for joining us this morning. We look forward to updating you on our further progress at our Trading Statement in January. And we will now take your questions.

Question-and-Answer Session

Operator

Hello. And welcome to the Sainsbury's 2023-'24 Interim Results Analyst Q&A Call.

On the call this morning is Simon Roberts, Chief Executive; and Blathnaid Bergin, Chief Financial Officer. [Operator Instructions]. Thank you.

Our first question is from Freddie Wild at Jefferies.

Frederick Wild

Really sorry. I couldn't unmute myself. Congratulations on the results. First of all, I suppose you could help us quantify the exact impact on half 1 EBIT from the Argos profit dilution. And then secondly, on the leverage point, you obviously post the Highbury & Dragon transaction, seeing leverage drop quite substantially. How do you think about the 2.4x to 3x range? And what would make you -- sort of what catalyst would make you change your mind about how to change that leverage and get back towards the upper end?

Simon Roberts

Okay. Great. Well, why don't I take your first question and then Blathnaid will take the second. Look -- so just in terms of the first half, I mean, clearly, we're really encouraged with our performance, first of all, particularly our momentum in grocery. And what you can see is that volume momentum has really driven the profit performance in grocers. We've really driven our volume outperformance. That's converted into strong profit delivery and grocery. On the other side of the business, of course, the summer was tough in GM.

And as we said in the presentation, there was a significant impact on both the mix and the gross margin, therefore, in GM as the weather impacts, not only was tough in itself, but in many ways, it was a double whammy because it was up against such a strong blistering heat wave through the summer last year. So when we stand back and look at our results, the fact that we've delivered a level UPBT year-on-year, I think, just demonstrates the strength of the profitability in the food business. We had a tougher period in GM. You've seen that we've delivered lower profits in the bank and therefore, just the strength of how much grocery came through in the margin.

Blathnaid?

Blathnaid Bergin

Great. Well, first, Freddie, I'm going to start with congratulations to you as well. I understand there's a new arrival in the house, a lovely baby girl.

Simon Roberts

Congratulations.

Blathnaid Bergin

So congratulations from myself and Simon on that. And just on the range. So, look, we are now comfortably in that range of 2.4x to 3x. I would not expect that to change between here and year-end, and we'll come back and update you in February on what the next steps are for us.

Operator

Our next question is from Andrew Gwynn at Exane.

Andrew Gwynn

There we are. Hopefully, all good.

Simon Roberts

Yes.

Andrew Gwynn

Yes. So firstly 2 -- well, 2 questions indeed. Just give us a glimpse on the strategy update. I suppose I hate to use the term, but I suspect there's probably more evolution, not revolution. And also maybe thinking a little less about cost saving opportunities, a little bit more about gross profit. Is that sort of a fair way of framing it?

And the second, actually, just going back to your slides, Slide 8 very interesting, obviously, showing very good progress with your customers. And obviously, you've made some very good progress with those secondary customers. Can you give us an idea of what the customers who aren't shopping at Sainsbury's are wanting to see? And maybe actually also a relative indication of how big that pool might be.

Simon Roberts

Andrew, thanks. Let's take those questions in terms, starting with our update in February. Look, I think, as you know, it's actually 3 years to this point, we announced our Food First strategy in November 2020. And so in February next year, we just think it's a great opportunity to be able to look back and really reflect on where the business is at. And of course, what we want to do is to share with you the progress we've made but also importantly, look ahead to how we see the opportunities ahead. And we'll spend a lot of time as a team with you in February talking about that. And actually talking about the industry backdrop as we see it today and therefore, as we make more progress with our strategy, where we see the next stage of that value. So 7th of February, looking forward to that day with everybody.

In terms of your question on our profitability, look, as we've both described in our results today, we're really encouraged with our momentum, particularly in the grocery business, the fact that we have been able to drive the volume performance in the way that you've seen, the fact that we've taken sharer from our competitors and particularly for the first time in this half from the limited choice discounters and the fact that, that volume is driving the outperformance in terms of the performance of our food business and our profit delivery. And that being achieved against the backdrop of a much tougher summer in GM because of the weather, frankly.

The momentum in the Argos business is strong. We're gaining share. But of course, it was a really tough comparative that we anniversaried against and with the impact of the Bank. So, I think when you think about all of those things, the fact that the profitability was level year-on-year just points to the strength of the momentum in the food business. In terms of your point to Slide 8, look, you remember back, I remember the conversation we had at the time in November 2020, when we shared with you that the issue that we had to face into with our Food First strategy is that we were simply too expensive. And that was particularly the case with secondary customers, who increasingly were doing the smaller part of their shop with us and the bigger part of their shop with somebody else.

And really, what we're seeing now is that's what's fundamentally changed. And so winning those secondary customers back, anchored in those investments we made at the center of the play. I'll reflect back to a time when our meat, fish and poultry aisle and our veggies, fruit and vegetable areas were just not abundant enough with stock. We weren't really driving the offer. And when you look at those parts of the store now, they're absolutely driving the core of our business. And what we're seeing is that customers are buying into the really strong offer and shopping the rest of the basket team.

Look, I think on your final question, always opportunities is the way I would frame it. We're growing our volume in food. We're continuing to build trust and confidence with our customer base, particularly on value. And look, as you can see in our charts today, it's all about the consistency of that value position month in, month out. We want to build a real trust with our customers that they can always rely on our value. And as we continue to do that, we'll continue to keep pushing ourselves to win more customers back into Sainsbury's. There's always opportunities to do that.

Andrew Gwynn

That's all very clear. And apologies if you can't see me. Maybe that's a good thing.

Simon Roberts

No, we could hear you well, Andrew.

Operator

The next question is from Izabel Dobreva at Morgan Stanley.

Izabel Dobreva

So I had two. The first question is just around pricing. You have materially improved your price gap. Are you satisfied with where they sit now? Or should we expect you to continue the pace of inflating behind the market by, say, 100 to 200 basis points over the next 12 months? And the reason I ask is because, of course, the pricing will likely come off at market level next year. So it may be more difficult to maintain that level of pace. That's the first question.

And then the second question is just going back to the profit. The retail EBIT was flattish, whereas one of your close peers reported retail EBIT up about 17% over the same period. And I appreciate that there is Argos in there, there's GM weakness, but it's still a little bit counterintuitive considering the strength of your volumes, but also the savings program. So could you give us some color so that we can understand how your pure grocery performance would have compared over that period?

Simon Roberts

Isabel, thank you. Well, why don't I speak to pricing and then Blathnaid will share with us her views on the grocery in terms of our sales and profit delivery. Look, on pricing, a couple of really important things to say here. The first thing to say is, as I hope you can see, as a team, we've been absolutely focused on converting a pricing position that 3 years ago was too high. and step-by-step, through our Food First strategy, that has been an absolute focus for the whole team. And what you can see now is how strong our pricing position is. We always said there was a period of heavy lifting to do. We think we've done the vast majority of that because as you saw in the charts today, we've improved our pricing position against all of our key competitors. And we are just much more competitive. So our strategy, which has been about driving our cost saving programs across the business, reinvesting that as fuel for investment in price, has got us to that competitive position.

And importantly, we're now regularly quoted in Kantar, Nielsen and the Grocer as being the cheapest at the full choice supermarkets and customers are trusting us more. So the key point here is we've done the heaviest part of the work. Of course, we continue to make sure that as inflation comes down, we pass on savings to customers just as soon as we can. We've closed, as you can see, the gap to the discounters significantly. And having done all of that work, the job now is to maintain the strength of that position. But I think it's important to be really clear, we've done the vast majority of what we needed to do. And as we look ahead, the reason our cost saving programs continue to be so important, and as I hope you saw in the presentation, we are building the next phase of the work there, so we can continue to sustain the strength of our competitive position.

Blathnaid?

Blathnaid Bergin

Great. Thank you, Simon. So look, on grocery, we're really pleased with the volume, and we've talked before that more volume over what is a largely fixed cost base to help drive our profitability. The other thing is we've seen inflation is starting to ease, so we should see some of that margin coming back as well, as inflation eases towards the end of the year. Mix, again, over the summer, we had a tough summer. So we saw some of that mix coming in as we saw more -- sold a lot more tech versus the seasonal products. So again, a little bit of a challenge there, but nothing that we can't navigate through in H2 because we're fully locked and loaded for Christmas.

The other sort of things I'd point out is our Save To Invest program is on track to deliver £1.3 billion this year. And we're continuing to drive that program hard, and we're starting to think about what the next phase of that program looks like for us. But we are very focused on returns and on profitability in the business, and you'll continue to see that drive and focus in the business.

Simon Roberts

Thanks, Izabel. I mean just the last point to make to your question now I think is I can't think -- we can't think of a more important time to really be with customers on great value. And that, as you can see, is what we've really focused on here, and that's what's driven the volume. And in the end, more volume of the fixed cost, as Blathnaid says, is a really important equation that we continue to work towards driving forward.

Operator

Our next question is from Sreedhar Mahamkali from UBS.

Sreedhar Mahamkali

A couple of things, really, Simon, on momentum, which is really important in retail business. You've talked about it a few times. Maybe a near-term one on momentum first. I think you talked about momentum building into second half. You sound very confident on Christmas. What is giving you that confidence that this momentum and relative outperformance will sustain into Christmas? And also talk a little bit about Argos because I think that point about momentum, I just wonder if you're talking specifically about grocery. That's a near-term one.

Secondly, I think building on some of the comments you've made and the sort of hint you've given on the 7th Feb, a bigger picture one. As you sort of wrap up 3 years of Food First, significant price investments, volume growth that is now beginning to come through, can you now target and achieve consistent market share gains and faster growth than in the past on a sustainable basis? Is that something that we should be actually looking for?

And then finally, just on the profit outlook. I mean, given your plans and momentum in grocery, it certainly feels to me that you could have gone even a bit higher on the profit outlook. Is it reasonable to then say that you perhaps decided to retain some flexibility in there and build some caution into it?

Simon Roberts

Thanks, Sreedhar. Okay. Let's tackle each of those in turn. And look, on the first point, we're at just over 50 days to Christmas. And as you'd expect, we are going all out to give our customers the very best Christmas that we can. Our focus is about really delivering for our customers, delivering great value, delivering great products and delivering through our fantastic teams, the very best service. The focus is all about customers. And that's what you can see we've driven in the first half of this year. It's the reason why we've done everything that we've done to really do the best we can to help customers through all the challenges of the first 6 months, and it's rewarded us with the volume that we've had. So strong plans going into Christmas, both on grocery and in Argos.

And to your question that we'd expect the quarter 3 performance in Argos to be stronger than quarter 2, of course, we are up against a big effect last Christmas when the Royal Mail strikes gave us quite a tailwind in the last 2 or 3 weeks. So some tough comps to anniversary as we get much closer. But we're going into this period on the GM side with great availability, stronger metrics in terms of customer satisfaction and a really, really strong assortment on the GM side. So although customers are being cautious, of course, they are, we think we're putting a strong foot forward there to really make sure we deliver.

On the grocery side, look, you can see in our presentation, we've gained volume every single week against the market throughout the half, and we continue to build on that position. And so our plan this Christmas is very much anchored on continuing to deliver for our customers, what we think they're going to want to buy into, and that's the value and the range, the innovation that you've seen this morning and then just being operationally really strong. And just as I said in the presentation, our teams are doing an absolutely fantastic job at the moment, really focused, really focused on customers, and we're going to push ourselves to really deliver for them. So that's the near-term.

I'll take your last question next in terms of the outlook for this year. Look, we've always said that retaining flexibility, agility in the moment is important to us. We've become a more agile business. We want to be able to respond to opportunities that we see in -- as they come, and that's why we retain flexibility. Of course, there's also a lot still to happen. And there's absolutely no complacency in our business and our team about what we need to deliver in the next 7 weeks, quarter 4, there's a lot still to do. There's a lot still to deliver. And so we retain that flexibility because we want to make sure we make the right choices.

And as you've said, look, if you look at the half, without the challenges in the GM business due to the anniversary of a very good summer, and without the challenges in Financial Services, our performance would have been, as you can see, quite a long way ahead of what we've talked about. So you can just see the strength and momentum in the grocery offer. And coming to your mid question, therefore, in February, we'll talk about the next stage of our plan. Look, you wouldn't expect me to do a kind of version of that today. Wait until February. But what I hope you take from our update this morning is we've got strong momentum, we're really focused on how our strategy is delivering. We're really clear where the value is delivering both for customers and for shareholders. And we look forward to sharing with you as a team where we want to take that next.

Operator

Our next question is from William Woods with Bernstein.

William Woods

A couple of questions. Firstly, on pricing and the pricing outlook. How much pricing do you think you're still getting from suppliers right now? And linked to that, in terms of the promotional environment, are you seeing an increase in promotional activity from your suppliers? And how willing are you to take that promotional activity, given a stronger focus over the last couple of years on everyday low prices? And then a slightly longer-term question, just on range. Do you think there's more work to be done on range optimization, whether that's SKU count reduction or optimization in certain categories?

Simon Roberts

Okay. Thanks, William. Well, let's talk first of all, I guess, sort of heart of your first question is on pricing, what's happening with inflation and what are we seeing in terms of inflation coming down and where is it coming down more quickly and how are we working with suppliers on that, then we'll pick up your point on promotion, then we'll finish on range.

So look, I think the good news is inflation is coming down. It's coming down month-on-month. We've always said inflation at Sainsbury's is running at about half the headline rate that the ONS talk about. And so you can see both in our performance, but also in the strength of our quarter 2 number, actually, as inflation has come down, how strong the underlying volume is that sits within that number. Look, of course, I would say that in fresh food, inflation is coming down more quickly. Those were the categories and products where we saw inflation lift first and the most. And as that has rolled over in a number of categories, meat, fish and poultry, bakery, dairy, we're seeing inflation come down more quickly in those categories. In other categories, it's not the same. Some of the commodities, sugar and cocoa would be good example where there's still upwards pressure on those commodities. And so inflation overall coming down, different speeds of that, depending on the category mix.

In terms of your conversation with the suppliers, look, I mean, as I said in the presentation, our supply base are doing a fantastic job with us, backing our Food First strategy. And what we've seen is a real commitment to lean in to back the volume position that we're building. As we've launched Nectar Prices, that's come at a very good time, particularly on the big branded products to be able to bring great value to customers as some of our suppliers really want to drive their volumes on branded. And so we will continue to make sure, at its heart, we give customers great value, working closely with suppliers, both on that level of value, but also, very importantly, I think, on availability. We've had really strong support and availability is something that customers always value first.

On promotion, look, I think it's really important to say that participation is increasing a bit, and we can see that there's a bit more promotional mix out there. But importantly, I think also to say, still much lower than historically what we would have seen a decade or so back. So we don't see it returning to anything like the elevated levels that we saw. What we see is a bit more promotion in the market as values being so important.

And then on your last question, look, I mean, I think one of the things that we are super proud of in Sainsbury's is our assortment. It's one of the things that makes our proposition for customers so strong and one of the things that we think we can do more of. And of course, the team, Rhian and the team are doing a brilliant job constantly looking at how we're evolving our assortment. You've seen this morning, the new products, the new propositions that we're constantly bringing forward. These things take a long time to develop, as you know, the new back wall solutions that we've shown you this morning, these things take a long time. Teams are working really hard to do that. And as we bring new propositions forward, we're always looking at what we do with the tail. We're always looking at how we optimize our assortment for more customers, and we'll talk more about that. But these ranges are important. What we're really focused on here is how we make sure our assortment is driving even more value for us.

Operator

Our next question is from James Anstead from Barclays.

James Anstead

Simon and Blathnaid, three quick ones. Firstly, I think you partly answered this a moment ago. I was just going to ask about customer behavior changing in any respect. People have been perhaps surprised that customer spending has held up. You talked about promotions stepping up, but any other kind of changes in behavior you're seeing? Secondly, another one you've kind of touched on, but in terms of inflation/deflation, what do you think the chances are that the industry and you move into outright deflation at some point next year? And then the third one, a little bit provocative, but you mentioned, you think you've done most of the heavy lifting. Can we interpret that as you think there's an opportunity for margins to edge up a bit in the future?

Simon Roberts

Okay, James. Well, let me maybe talk on the customer behavior point and where we are on deflation and maybe, Blathnaid, in terms of where we are on the margin outlook as much as we can say.

Look, I think on customer behavior, a couple of things really importantly to say here. Look, of course, it continues to be really tough. And our primary focus, as I said a few minutes ago, is we can't think of there being a more important time to be really on the side of customers. That's why our strategy started with being better value and is becoming even more the center of our focus as the last 6 to 12 months has unfolded. And what we can see is customers continue to be cautious, right? They've got a fixed amount of money in their mind in terms of what they're going to spend. That's on food and on GM. And so what they're looking for is the real trust in the quality of the proposition in value. And that's why I think we are delivering the volume performance that we are. Customers can see that our value is strong. They can see it's consistently strong. And as a result of that, whilst they're still being cautious, they're spending more of their basket in Sainsbury's.

I think what we're seeing is, definitely in terms of the weeks ahead, customers are clearly looking forward to Christmas. They want to celebrate Christmas, they want to trade up, but they want to, again, do it at really good value. And so I guess, this whole narrative really comes back to what we've said, James, which is we've got to be strong on value. We've got to be really strong on quality. We want to make sure that the service metrics are good. And it's a combination of all of those things that customers are going to expect us to continue to do.

And I think when we think about where we go next on all of this, Blathnaid, do you want to speak a bit to the food margins?

Blathnaid Bergin

Yes. So if we go back to what we've talked about in the past, we recognize that in the financial year '20, we were too expensive. We've done a lot of the heavy lifting that we needed to do in resetting our prices, but we will continue to remain competitive on price. And we also believe that the market will continue to behave and act rationally around this. We are very focused on volumes. And you'll see today, in some of the charts, that we are winning back volume market share and volume over our fixed cost base should help us drive profitability into the business. And again, as we see some of this inflation unwind again, that should help our margins.

And the other thing I would add on that is we are coming towards sort of the end of our first phase of our cost-saving program that will deliver £1.3 billion by the end of this year. There are more costs for us to go after. There are some unique opportunities that we have at Sainsbury's that some of our other competitors and peers don't have. So we'll continue to drive that cost really hard. And again, that should drop through to our profitability. We are very focused on returns and we're very focused on cash. And you'll see that today, we increased our cash guidance to at least £600 million this year, and we'll continue to have that cash focus in the business as well.

Simon Roberts

Thank you. And then on inflation/deflation, James, I think, look, I mean, a couple of things to say. I mean the first thing is we don't see deflation. If we think about the amount of pressures that's still in the system, wage inflation is substantially up, energy will get better, but that's still a headwind. So I think when you stand back, what we see is a continual improvement in food inflation as we move forward, so that being the key basis rather than disinflation. Look, we've been very clear, we're going to pass savings through to customers. We're doing that. As you've heard me say, our levels of inflation are about half the ONS. We've got that higher level of cost in energy. And so I think the key point really that sits behind your question is that this industry will continue to behave very rationally because there's lots of costs in the system that are going to maintain, pertain. What we all have to do and what we're very focused on, as Blathnaid just said, is continuing to find cost savings, which means that we can invest in the offer where we need to, and that is the core of our improved competitive position.

Operator

[Operator Instructions]. Our next question is from Nick Coulter at Citi.

Nick Coulter

So just, I guess, three quick ones to close the call. So firstly, just a follow-up. I mean, how do you judge the pricing position or gap that you need, please? I guess over the last quarter, you're almost a disruptive force in the market in terms of relative investor. I'm not asking for kind of what your absolute pricing target is. I'm sure it is relative to other names, but would be helpful to get a sense of how you think about that. What's good enough? Obviously, taking share, volume share from everyone is probably not achievable every quarter. So that will be the first one, please.

Simon Roberts

Thanks. Well, I mean, I think, look, you'll know this when you look at the history, we've anniversaried some tough comps in the quarter. And actually, as we look ahead, our comps position is increasingly tough. So the reason I say that is when you look at our quarter 2 numbers, they come against a strong quarter last year. And what I think it shows is that as our value becomes more trusted by customers and we're consistent with it, that enables us to build more momentum even though we anniversary tough comps. That's an important point to make because as we look ahead, look, our objective here is to make sure we give customers every reason to shop at Sainsbury's. Our objective is to be competitive. But as I said in the previous question, we've done the vast majority of the heavy lifting on price, we think. We think this market will continue to behave rationally. It's a very, very intensely competitive market. We all know that. We're all facing the same challenges.

And so the job for us is to make sure we can continue to find the differentiated cost savings that have been the core of sustaining that value position. And as Blathnaid just said, we've come to the end of this 3 years having delivered so far, £1.1 billion of the £1.3 billion we set out to deliver. Remember, and that was twice the run rate of our previous history. And look, as a management team, we're very focused on the next phase of that because that will be important to make sure that we can continue to maintain the strength of what we have now begun to sustain. And I make that point because, honestly, we still see a lot ahead to do. We've begun to really transform the performance of our grocery business. And we want to talk with you in February about where we take that next because we think, in the context of the wider market at the moment with a strong balance sheet and with the strength of our customer momentum, we've got more to do next.

Nick Coulter

And is it that behavior of the secondary customer that kind of gives you the indication that you're where you need to be? Is that the kind of job done, box ticks kind of scenario?

Simon Roberts

Look, it's never a job done, is it? It's never a job done. I mean I think the reality is that in 2020, we spent time doing 2 main things back then. I mean the first thing we did was, as an industry, we were all dealing with the demands of the pandemic. But in Sainsbury's, we spent a good number of months having a really good look at how our customers were shopping our grocery offer. And what we learned back then was that actually customers wanted to shop at Sainsbury's. They liked the offer, they liked the assortment. They liked all of the things that we could deliver, but we were just simply too expensive.

And so that's why we made the core focus of our Food First plan, improving our competitiveness, as you say, particularly for secondary customers because they had too many easy choices to shop somewhere else. And what we've begun to do is make those choices more towards us. And as I say, I think there's still more to do. It's the consistency that matters. We've done the majority of the heavy lifting. It's maintaining week in, week out so that when customers come to our stores, they see that our value position is as good as it is now, and that's what we're working very hard to sustain.

Nick Coulter

Great. And maybe one for Blathnaid on working capital. Obviously, grocery inflation, perhaps lingering a little longer than anticipated. So maybe based on what your thoughts might be that the year-end outturn for working capital, notwithstanding it's always a little bit of a hard one to call.

Blathnaid Bergin

Nick, that's a great question. It is a hard one to call. We called the cash guidance up today because we are anticipating a little bit of upside coming from that inflation. We've also got a lot of discipline around our stock management at the moment and how we're managing our buys. So again, that's one of the reasons we upgraded our cash to at least £600 million. So you'll see some of that drop in at year-end, as we're very focused and disciplined on how we're managing our working capital with [indiscernible].

Nick Coulter

Okay, Blathnaid, so we should think of that being an inflow? Or how should we think of the working capital for the full year?

Blathnaid Bergin

So I would think of it as an inflow. So within the at least £600 million, we baked in a little bit of an inflow into the working capital through stock management actions.

Operator

Our next question is from Clive Black at Shore Capital.

Clive Black

Well done on your hard work. A few for me. I'll try and keep them short. First of all, just for purposes of clarity, because I think Izabel, William and Sreedhar kind of asked the same question. Your grocery business was materially profitable year-on-year, wasn't it, given the sizable headwind in nonfood? You just want to be clear about that, yes?

Simon Roberts

Yeah, I mean, look, absolutely, just for the absence of any doubt, the fact that we've delivered £340 million this year compared to £340 million last year with one of the toughest summers impact in the GM business and the headwinds in Financial Services. And we're really delighted with the grocery performance. It's driven by volume. It's driven by more customers in our stores. It's driven by a brilliant job across our food and grocery teams, right the way through the business. And you can see that volume converting into that profit delivery. So yes, really encouraged by it, and there's more for us to do.

Clive Black

In terms of -- I know you talked about this in February, but just to contextualize, where do you see the magnitude of the opportunity in automation, robotics and machine learning in the next chapter of the business, just to contextualize it with the...

Simon Roberts

Thanks, Clive. Well, look, as you know well, we've got a very ambitious cost saving, more importantly, that efficiency plan in our business. This is all about being more efficient. How do we spend time, resources, capital and our time on the things where we can add value to customers and shareholders. And of course, this area is one of the key ones. And if I think about the way that our supply chain is now working compared to 2 or 3 years ago, it's an absolute transformation where we've moved on to a completely new platform. We are working in very different ways in terms of our ability to forecast more accurately and improve our availability and to do that with a completely different platform than we've had before.

The same is happening in our logistics operations. You saw in the half, we confirmed our intention on the GM side to move to an automated capability there. I was in our warehouse in Daventry a couple of weeks ago. We're partway through the build. It's a highly intensive program that's going to transform the way that our logistics operations work. In many areas of our business, whether it be in grocery online, whether it be in our trading areas, whether it be in operations, we're using AI to really think differently about how we can automate our decisions, and we're automating in the physical space where there's real efficiency.

So we'll talk a lot more about it in February, but it's very much at the core of the way we're thinking, and in hand-in-hand with amplifying the role of our colleagues even more. I think these 2 things have to be thought about together. How do we become more efficient? And then how do we show up for customers in our stores in a way where our brilliant people can be even more available for customers. And those 2 things are the way in which we'll talk more about this in February.

Clive Black

Cool. And then just lastly, I mean you're virtually, on a nonlease basis, . I just wondered whether you see that as a competitive advantage in the present grocery market.

Simon Roberts

Yes, Blathnaid, do you want to maybe speak on that?

Blathnaid Bergin

So we do -- Clive, it's great to have a strong balance sheet. It's great to have flexibility. We are comfortably inside that range. And as I said earlier, I will update in February on what we're going to do, but we are really pleased with the strength of our balance sheet, and it does give us comfort.

Simon Roberts

Yes. And I think, look, Clive, in the context of the wider market, there's a lot to be said for the moment in having the flexibility and the strength of the balance sheet that we now have. We've worked very hard to get to this position. There's been a lot of changes in the nature of this industry over the last couple of years, and we want to position ourselves to be able to make the right choices for our shareholders and really deliver for our customers. And the strength of our balance sheet, the fact that we're in a much stronger position than we were, gives us lots to think about as we look at the next phase of our value and growth.

Clive Black

Yes. It's quite interesting that equity capital markets are much aligned, but the 3 listed grocers, , Sainsbury's and Tesco are by far the strongest of the U.K. grocers at the moment compared to leveraged private capital. So worth thinking about it.

Simon Roberts

Thank you, Clive.

Operator

And our final question is from David Roux from Bank of America.

David Roux

Well done on the results today and excuse the lack of video. I just had a couple of questions from my side. Just on clothing, I appreciate it's a small part of the business, but perhaps a market where your competitors don't act as rationally as your grocer competitors. I mean, given the market has become more competitive over the quarter, do you think this may mean you need to step away from your full price strategy? And then my second question is a sort of bigger picture topic. We've obviously seen the introduction of the new highly effective weight loss drug in the U.K. Are there any discussions internally going on in Sainsbury's as to what the bigger business impact could be if consumer behavior does indeed change because of this?

Simon Roberts

Okay. Well, look, thanks for your question. Let's take them in turn. Look, on the first one, look, clearly, clothing had a tougher summer than we planned for, and that was really driven by, first point, the weather being so tough. And it's worth saying, in supermarket clothing, it behaves much more on the basis of impulse than perhaps the high street does and so when the summer is cooler and wetter as it was, what we saw was less impulse purchasing on the grocery shop of clothing, and the fact, as you say, that we very intentionally chose not to be promotional or highly promotional. That was the right decision for us to take. We chose not to discount. We protected margins, and we came out of the summer in good shape in terms of stock. So net-net, I think we've navigated what was a difficult summer very well.

That being said, I think there are some things that we could have done better. Our womenswear ranges in places could be more on point, and we very much recognize that and are working to improve it. And actually, what we can see in the last number of weeks, actually, as the weather has got better, we've seen our performance really pick up again. So clothing's a key part of our supermarket proposition. We had a tough July, August, early September, so things that were macros and things that we can improve.

But the last point to make is it's actually a small part of our business in terms of revenue, just under 3% of our revenue, and therefore, the impact on profitability wasn't in any way significant but always an opportunity for us to continue to improve.

On your point on the weight loss drugs, I mean, look, I think it's too early really to talk about where this goes. What I would say is, look, obviously, we are very focused at Sainsbury's on healthy choices. One of the things that we're really proud of as a team is that we have a very high benchmark for healthy choices. We continue to see customers really engage in a number of the activities we do. For example, the great Nectar Great Fruit & Veg challenge will be a good example where more customers are coming in to take part in activity and opportunities to eat more healthily. And so we continue to drive very hard there. And look, we'll continue to monitor this issue and see how it develops.

Operator

That was our final question. I will now hand back to Simon Roberts for closing remarks.

Simon Roberts

Okay. Look, thank you. Thank you, everyone, for your time this morning. I know it's a busy time for you. So thank you for joining us. Thank you for your really great questions. And we really look forward to seeing you in January. It's obviously a really big moment as we kick into our Christmas launch now. Our TV ad goes live tomorrow, so look out for that, starring Sainsbury's colleagues. And we look forward to seeing you in January at the trading update. Thanks, everybody. See you soon.

For further details see:

J Sainsbury PLC (JSNSF) Q2 2024 Earnings Call Transcript