Sainsbury's profits fall 15% after ASDA deal failure

Supermarket chain Sainsbury's on Thursday reported a 15% fall in interim profits due to the phasing of cost savings, higher marketing costs and tough weather comparatives.

Sales fell 0.2% to £16.8bn during the 28 weeks to September 21, with like-for-like sales down 1%. Food sales fell by 0.1% against last year when demand was driven by the warm summer, while general merchandise sales were 2.5% lower and clothing dropped by 1.2% in a "a subdued non-food market".

Underlying pre-tax profits fell £238m, down from £279m. On a statutory basis, pre-tax profits, including a one-off £200m write-down in the value of its property portfolio, came in at £9m compared with £107m a year earlier.

The slump in profits comes after a failed £7.3bn attempt to take over rival Asda, which was blocked by the UK's competition regulator. It also faces significant completion from discount competitors such as the German chains Lidl and Aldi.

“Retail markets remain highly competitive and the consumer outlook remains uncertain. However, as guided in September, we expect profits in the second half to benefit from the annualisation of last year's colleague wage increase and a normalisation of marketing costs and weather comparatives,” the company said.

Chief executive Mike Coupe on Thursday warned of a "hangover“ in the new year if the Brexit issue was not resolved. Prime Minister Boris Johnson has called an election for December 12 having claiming parliament has blocked his efforts to secure a deal with the European Union, despite the fact MPs actually voted in favour of giving his proposals further scrutiny.

"All our experience will say that people will celebrate Christmas, they always do. We would expect that we’ll do well over Christmas,” Coupe said.

“But depending on the outcome of the election and how quickly we get the whole Brexit situation resolved, there may well be a hangover into the new calendar year.”

Last month Sainsbury's said it would shut 125 outlets, including 70 Argos shops, as part of efforts to generate £500m of cost savings over the next five years.

On Thursday it added that it had refurbished 172 supermarkets and 158 convenience stores during the first half as part of its plans to improve a total 650 shops this year. All Argos shops were expected to be converted to a digital format by the end of this year.

“We have set out our plan to create one multi-brand, multi-channel business. This will make the combined Sainsbury’s and Argos offer much more accessible for customers and gives us the opportunity to make our business more efficient,” Coupe said.

Richard Hunter, head of markets at Interactive Investor, said the "largely uninspiring" update would likely raise further questions on Sainsbury’s strategy following the failure of the Asda merger.

He said the retailer "now has to decide how to differentiate itself in a notoriously competitive sector".

"At the moment, the company is clearly using price as a weapon, while also committing to cost savings of £500 million, as previously announced. At the same time, it is looking to reduce net debt further and indeed has reduced the figure by 5% year-on-year, with an additional £300 million plus reduction pencilled in over the course of the year."

"One thing that cannot be disputed is Sainsbury’s ability to generate cash, which will continue to be crucial in its capital deployment plans. In the meantime, however, Sainsbury remains somewhat under the cosh."

Hargreaves Lansdown equity analyst Sophie Lund-Yates said Sainsbury's faced a battle to compete in a fast moving sector.

“We’ve had good news from M&S’ food business this week, and its deal with Ocado will just add more pressure into the mix. It begs the question: what can Sainsbury’s do to differentiate itself? The integration of Argos has been a step in a new direction, but despite the cross-selling potential, it hasn’t been enough to boost overall sales."