Price War Takes Its Toll On Sainsbury’s Profits

Sainsbury’s has today reported lower annual profits and sales as the ongoing price war and ensuring food price deflation took its toll.

For the year to 12 March 2016, the group’s underlying pre-tax profit fell 13.8% to £587m on total group sales down 1.1% at £25.83bn. Statutory pre-tax profit, which includes property, pensions and one-off costs, come in at £548m, recovering from the previous year’s £72m loss.

Price investment and underlying food price deflation, partly offset by the increased cost savings of £225m, resulted in Sainsbury’s retail underlying operating profit decreasing by 11.8% to £635m and its retail underlying operating margin decreasing by 33 basis points to 2.74%.

Meanwhile, like-for-like sales over the period fell 0.9% with sales in its 601 supermarkets slipping 1.6%.

Despite the disappointing headline figures, the group said it was seeing volume and transaction growth in its stores, driven by product quality improvements and its simpler pricing strategy. Its online grocery operation and fast-growing convenience chain both saw sales rise by 9%, whilst its non-food operations saw good performance in clothing (+8.5%) and general merchandise (+3.5%).

Sainsbury’s also revealed that it was now operating 15 Netto stores through it joint venture with Dansk Supermarked. The group said the trial outlets were helping it build its understanding of the discount sector with operational insights benefiting its core business. It added that it will review the performance of the venture in light of the overall market and will communicate its next steps for the business at its interim results in November.

Commenting on the results, Chief Executive Mike Coupe said: “We are making good progress against the strategy we outlined to shareholders in November 2014. We continue to outperform our main supermarket peers and maintain market share in a competitive, deflationary environment.”

He added: “These results reflect the multi-product, multi-channel shopping experience customers are looking for today and our proposed acquisition of Home Retail Group plc will accelerate our strategy in this direction.”

However, Coupe warned that the competitive trading conditions showed no signs of easing with food price deflation likely to continue into the second half of its 2016/17 financial year.

NAM Implications:
  • Retailer finances are basic, very basic
  • This combined with a low net margin means any set-back in sales, or increase in costs, dilutes the bottom line
  • On the other hand, even the slightest improvement is amplified in bottom line
  • …and therein lies the opportunity for financially-skilled NAMs…
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