Competitive Trading Conditions And Rising Costs Take Their Toll On Sainsbury’s Profits

Despite a boost from its new Argos division, Sainsbury’s has today reported a third straight year of underlying profit decline and warned of further tough times ahead.

During the 52 weeks to 11 March 2017, the group’s underlying pre-tax profit edged down 1% to £581m, reflecting investment in price cuts and cost inflation.  This was offset by cost savings of £130m and a contribution from Argos of £77m.

The acquisition of the Argos business, which was completed last September, contributed to overall group turnover rising 11.6% to £26.22bn. However, costs associated with deal contributed to statutory pre-tax profits slipping 8.2% to £503m.

As previously reported, annual like-for-like sales in the Sainsbury’s chain were down 0.6%, although this was a slight improvement on the 0.9% dip the previous year.  The group said that supermarket sales declined by nearly 2%, whilst in its 800-strong convenience chain they grew by over 6%.  Online grocery sales were up by over 8%, whilst total sales at Argos grew 4.1%.

The group stressed that food performance was “resilient” with consumers said to be responding positively to the chain’s new focus on lower regular prices. Sainsbury’s revealed that total transactions over the year increased by nearly 3% to 26 million per week.

Sainsbury’s Chief Executive Mike Coupe said: “This has been a pivotal year and we have made significant progress delivering and accelerating our strategy. Our food business remains resilient in a challenging market and we continue to innovate in quality and to invest in price. We are also investing in growth areas of the business to meet the changing ways that customers shop.”

He added: “The market remains competitive and the impact of cost price pressures remains uncertain. However, we are well placed to navigate the external environment and we remain focused on delivering our strategy.”

Sainsbury’s said that although recent price rises have so far benefitted its food business, its non-food sales had been impacted by reduced consumer confidence and a marked slowdown in real pay growth.

Meanwhile, the group said it would deliver a £160m EBITDA synergy target from the Argos acquisition six months early and would accelerate a plan to open 250 Argos Digital stores in its supermarkets. It also revealed that the business was on track to deliver its three-year £500m cost saving programme by the end of 2017/18, with a further £500m of savings targeted over three years from 2018/19.

Sainsbury’s share price dropped more than 2% this morning after it was revealed that the group’s full-year dividend paid to shareholders has been reduced by 15.7% to 10.2p a share.

Commenting on the results, Neil Wilson, senior market analyst at ETX Capital, said: “Sainsbury’s faces a squeeze on several fronts. On one side, there are discounters like Aldi and Lidl crushing prices and stealing market share, while Tesco and Morrisons are both in the middle of strong turnaround programmes that are leaving Sainsbury’s trailing.”

John Ibbotson from industry consultancy Retail Vision commented: “Argos is undoubtedly the trump card responsible for the solid increase in group sales. But while Mike Coupe will be keen to dismiss the fall in underlying profits as a blip brought on by the cost of the acquisition, this should not distract from the weaknesses in the core Sainsbury’s grocery business.

“The convenience and online offerings are a bright spot in an otherwise challenging picture. Food price inflation has slashed margins and Sainsbury’s continues to lose market share to both Tesco and Morrisons. The brand’s much-vaunted turnaround plan has been slower to show results than those of its rivals, who have successfully staunched their losses with aggressive price cuts and structural reforms.”

He added: “Argos has so far proved an effective ‘get out of jail card’ for Sainsbury’s. But with inflation biting into consumer spending and the latest retail sales figures showing that the consumption boom is waning, Sainsbury’s must get its core business in order before its catalogue crutch is pulled from under it.”

NAM Implications:
  • With growth restricted in traditional Sainsbury’s markets, they need to diversify via online and Brick & Mortar.
  • Argos has proved to be a promising start, so opportunities for supplier products/services that fit.
  • Also worth exploring innovation with Sainsbury’s, carefully.