Alongside slightly improved quarterly sales figures, Sainsbury’s has warned that its first half pre-tax profits will fall due to the impact of unseasonal weather and higher marketing costs. However, it also laid out new plans to improve its performance, including ramping up cost cuts, accelerating debt reduction, and overhauling its store estate.
Over the 12 weeks to 21 September, like-for-like sales across both its Sainsbury’s and Argos chains were down only 0.2%, compared to a 1.6% fall in its first quarter.
The retailer no longer breaks out like-for-like performance by division. Total grocery sales increased by 0.6%, having slipped 0.5% the previous period. General merchandise sales declined by 2% and clothing sales increased by 3.3% – both improvements on the first quarter.
“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. He highlighted progress on reducing prices on everyday grocery products to improve its competitiveness. The group has also been investing in its supermarkets in a drive to improve service and product availability.
In its Argos business, the group stated that sales were impacted by reduced promotional activity and the timing of new products. Clothing sales were boosted by clearance activity.
Following Sainsbury’s failed attempt to merge with Asda, Coupe is under pressure to show the business can prosper on its own. Ahead of today’s capital markets event for investors, he outlined initial details of his new strategy.
This includes reducing costs by about £500m over the next five years as it brings its businesses closer together, in addition to ongoing savings to cover the impact of cost inflation. The group has also increased its three-year net debt reduction target to at least £750m, from £600m announced previously, with it forecasting a reduction of at least £300m in its current financial year.
Meanwhile, the group revealed plans to overhaul its store estate, shedding underperforming and surplus outlets. Around 10-15 supermarkets will close but 10 new outlets will be opened. There will also be 30-40 closures in its convenience estate, whilst 110 new stores are planned. The group’s Argos business will see 60-70 standalone stores shut as it opens more (80) of the catalogue shop’s outlets within its Sainsbury’s outlets.
The closures are expected deliver a profit benefit of about £20m per year, while the one-off costs will be £230m to £270m.
The group also revealed a new five-year plan for its struggling financial services division. Just weeks after Tesco sold its mortgage business, Sainsbury’s said it will immediately stop new mortgage sales as part of plans to double the division’s underlying pre-tax profit and return cash to the group.
Looking ahead, Sainsbury’s warned that it expected its first half underlying pre-tax profit to come in £50m lower on a year ago due the combined impacts of the phasing of cost savings, unseasonal weather against a strong comparative period last year, and higher marketing costs.
However, it stressed that the second half was likely to benefit from the annualisation of last year’s staff wage increase and a normalisation of marketing costs and weather comparatives. As a result, Sainsbury’s is forecasting that its full year underlying pre-tax profit will be in line with analysts’ consensus expectations despite operating in what it described as a “highly competitive” retail market where the consumer outlook “remains uncertain”.
NAM Implications:
- Cost-cutting buys time…
- …but the City wants to hear about more profitable sales increases…
- …and how Sainsbury’s plans to deal with the discounters.
- Sainsbury’s, in common with other mults, has a large space redundancy issue.
- Moving Argos branches into a nearest Sainsbury’s Hyper/Superstore helps…
- Closing non-profitable branches helps…
- Adding franchisee space spreads the cost burden…
- But why not incorporate an ‘Aldi-Lidl aisle’ containing every discounter offering into every Hyper/Superstore.
