Sainsbury's sees £50m fall in interim profits but holds FY outlook

Supermarket group Sainsbury's said first-half pre-tax profits would fall by £50m due to the impact of unseasonal weather and higher marketing costs, but maintained its full year outlook.

Second quarter total retail sales rose 0.1% excluding fuel, with like-for-like sales down 0.2% excluding fuel, com pared with a fall of 1.6% in the first quarter. Grocery sales increased by 0.6%, general merchandise declined 2% and clothing increased by 3.3%.

The company, which saw a £13bn merger with Asda blocked by the competition authorities earlier this year, on Wednesday said it would cut costs by around £500m over five years, in addition to ongoing cost savings to cover the impact of cost inflation. The three year net debt reduction was increased to £750m from £600m pounds.

"Sales momentum was stronger in all areas and we further improved our performance relative to our competitors, particularly in grocery," said chief executive Mike Coupe.

“While retail markets remain highly competitive and the consumer outlook remains uncertain, we remain on track to deliver full year 2019/20 underlying profit before tax in line with consensus expectations,” the company said in a statement on Wednesday.

After a store review, the company said it would open 10 new supermarkets and close 10-15, create 80 new Argos in Sainsbury's and close 60-70 Argos sites and open around 110 new convenience stores with 30-40 closures while forecasting a net operating profit benefit of £20m a year.

"We expect the one-off cost of closures and impairments to be £230m - £270m, of which the cash cost will be £30m - £40m," the company said.

In financial services Sainsbury's said it would stop new mortgage sales immediately and will not inject any more capital after £35m in the current fiscal year.

Interactive Investor head of markets Richard Hunter said the savings from store closure and cut in debt should also result in comfortable dividend cover being maintained. "The current yield of 5.2% has been a rare chink of light in recent times for investors," he said.

"The strategic review will need careful management, however. In a notoriously competitive sector and as seen in the past on numerous occasions, rivals move on rapidly, which can leave a company in the midst of a transformation behind. "

"With Asda out of the strategic equation, the hard work now begins in reshaping the Sainsbury offering, both in terms of financial streamlining as well as maintaining market share, margin and of course profit."

Hunter said Sainsbury shares had remained "in the doldrums", having fallen 33%, compared with a 2.9% decline for the wider FTSE 100 index.

"In terms of market consensus, there is considered to be better value elsewhere in the sector, with Tesco comfortably being the preferred play, although the general view of Sainsbury has at least recently ticked up to a hold from its previous sell rating,” he said.