Sainsbury's profits fall less than forecast from price fallout

Sainsbury's annual results showed the severe hit to its finances by the industry price war and ensuring food price deflation but profits fell less than analysts expected.

Total sales from Sainsbury's 601 supermarkets fell 1.1% to £25.8bn, while like-for-like sales fell 0.9%. Pure retail sales rose 0.4%, however.

Underlying profits before tax slumped 13.8% to £587m, though this was better than the consensus forecast of £575m, leading to underlying earnings per share declining 8.3% to 24.2p. Consensus earnings forecasts were for a number nearer to 22.4p.

At the statutory level the company broke even with a £548m pre-tax profit, from the £72m loss the year before.

After the interim dividend was cut back last year, the final payment was trimmed less than feared, by only a tenth of a penny to 8.1p, meaning the full year dividend will be 8.3% lower than the previous year at 12.1p, with cover maintained at 2.0 times.

"Our core food business performed well, underpinned by our quality investment programme, our simpler pricing strategy and lower regular prices," said chief executive Mike Coupe.

"We also saw strong growth in clothing and general merchandise, as well as in our convenience and online channels."

He said the ongoing pricing pressures and food price deflation were the reason sales, operating margins and hence earnings were narrower.

Retail underlying operating margin shrank by 33 basis points to 2.74% despite the FTSE 100 grocer making operating cost savings of £225m this year.

Coupe said he expected the current 2016/17 financial year to see cost inflation at the lower end of the 2-3% range, with the company making operational cost savings of around £120m, consistent with hitting its three-year £500m cost saving programme by the end of 2017.

"Sainsbury's will remain competitive on price in the market. Food price deflation is likely to continue in to the second half of 2016/17."