Sainsbury's interim profits slide as pension deficit mushrooms

Although it assured it was still confident of hitting full year targets, Sainsbury's underlying profits fell 10% in the first half of the year as like-for-like sales worsened and its pension deficit mushroomed.

For the half-year to 24 September, the supermarket group generated underlying group revenue of £13.9bn, which was up 2.1% on the equivalent period last year despite LFL sales falling 1.1% in the second quarter after the 0.8% decline in the first.

Underlying profit before tax shrank 10.1% to £277m, reflecting lower LFL sales, investment in the customer offer and cost inflation, only partly offset by cost cuts, while underlying earnings per share slipped 6.7% to 11.2p.

For the full year the group's expectations for underlying profit remains in line with current market consensus, though Sainsbury's second half underlying profit excluding the impact of Argos will be lower than that achieved in the first half, as a result of continued price investment and a step up in cost inflation in the second half.

Argos is expected to deliver an underlying profit contribution to the Group of £55m-£75m2 in the second half.

The dividend was cut 10% to 3.6p as part of the policy to pay out 30% of the previous full year payment, and directors said they plan to maintain the full year dividend covered two times by full year underlying earnings.

After completing the acquisition of Argos three weeks before the end of the period, the post-tax pension deficit swelled to £1.31bn and it has agreed to increase its contributions by £6m per year to £84m until 2021.

On the plus side, net debt reduced by £485m from March to £1.3bn but is expected to grow to £1.5bn by the year end.

Also chief executive Mike Coupe said that as well as remaining on track to deliver a three-year £500m cost saving by the end of the next financial year, he pledged to cut a further £500m of costs over the subsequent three years.

With Argos now under the grocer's wing, Coupe said 30 more digital stores will be opened by Christmas and a further 30 Argos digital collection points will be added in supermarkets as part of a rollout of 200 new digital collection points where customers can collect Tu clothing, eBay and DPD parcels.

"The acquisition of HRG accelerates our strategy to give customers choice, convenience, speed and flexibility in when, where and how they shop," he said.

"Food will always be at our heart and we are strengthening our clothing, general merchandise and financial services offers to realise the potential of the group. The combination of our products, services, customer data and fast delivery networks gives us a strong platform for growth and enables us to deliver clear synergies."