Sainsbury reports interim losses and warns of dividend cut

Due to increased investment in lowering shop prices, Sainsbury warned that its full year profits and dividend would be lower than last year's.

The grocer reported a 2.1% fall in like-for-like sales excluding fuel for the 28 weeks to 27 September, with underlying pre-tax profits down 6.3% to £375m, ahead of consensus analysts forecasts of £351m, but a statutory pre-tax loss of £290m.

Underlying results excluded a £665m charge, mostly from a reassessment of its store pipeline and a write-down of unprofitable and marginally profitable stores.

The interim dividend was held at 5p, but a new £150m investment in price cuts, of which half will fall in the second half of the year, combined with cost savings and outperformance by the banking arm in the first half that are both unlikely to be repeated in the second, meant that management expected profitability to be lower in the second half.

Due to the intense competition in the UK grocery sector, with like-for-like sales across the supermarket sector now expected "to be negative for the next few years" management, led by new chief executive Mike Coupe, have conducted a strategic review into the business.

As well as the new investment in price, Sainsbury's will cut capital expenditure and make significant cost savings, as well as ensuring it pays a more "affordable" dividend, with dividend cover now fixed at 2.0 times underlying earnings for 2014/15 and the next three years.

Cost savings of £500m will be delivered over the next three years, which is said to be a step up on recent levels, while annual capex over the next three years is guided to a range of £500-550m, around 2% of revenues, which is a reduction on previous guidance of £925m in 2015 and up to 3% of turnover thereafter.

Coupe said: "Our strategy is evolving to address the continuing shifts in customer shopping patterns which we believe will lead to a greater emphasis on product quality and ease of shopping, and an increase in multi-channel shopping."

The review found that a quarter of the group's stores are not in "the right locations" nor of the "right size" for Sainsbury's product offering so will either see an expanded non-food offer or "carefully selected concession partnerships".

The group still plans to open 100 convenience stores per year, making up around half of the 500,000 square feet of new space intended for each of the next two years, followed by 350,000 sq ft in 2017/18.

Broker Shore Capital noted that, with operating cash flow declining by around 25% and net debt at the period end at £2.38b, up £195m over the past 12 months, gearing now stands at 43%.

"Despite the greater visibility on Sainsbury’s strategic plans, we continue to believe that much of Sainsbury short-to-medium term prospects will remain dependent upon the magnitude of the much anticipated Tesco price reset

"Whilst we applaud Sainsbury greater capital discipline, the focus on debt reduction and strengthening the group’s balance sheet – we struggle to forecast future years with confidence."

Bryan Roberts, retail insights director at Kantar Retail, added that Sainsbury's establishment of a war-chest to fund price investment might help mitigate some advances by the German discounters, but he remains concerned that this nullifies only one of the discounters’ advantages: price.

"What it does not address is that the discounters are also winning because they are quick to shop and easy to understand, the latter not a quality immediately apparent in Sainsbury’s recent marketing endeavours. Concerns remain that Sainsbury’s will be first in the firing line when the sleeping giant Tesco reawakens in 2015, adding further pressure to Sainsbury’s already relatively scrawny margins.

"Sainsbury’s has some very clear strengths in areas like quality, service, provenance and instore execution, but playing to these strengths is clearly no longer enough. Sainsbury's realistic assessment of its store portfolio is refreshing: we await with interest to see next steps on repurposing excess space."