Sainsbury's profits slump 18% in first half as price war bites

Underlying total sales in the first half contracted 2% to £13.6bn, with food sales down nearly 1% but clothing up 10%, while reported total sales were in line with forecasts at £12.4bn, down 2% as market share declined by 17 basis points to 16.5% in the face of competition from discounters.

Retail earnings before interest and tax (EBIT), the choice measure of many City analysts, fell 14.4% to £332m but well ahead of forecasts, implying a margin of 2.7%, a fall of just 39 basis points compared to last year despite the fierce pressure of the grocery sector price war.

Underlying earnings per share tumbled 17.2% to 12p, also ahead of forecast of 11.5p.

The FTSE 100 grocer's interim dividend of 4.0p per share represented 30% of last year’s full year dividend but was down a penny, or 20%, from the 5p this stage a year ago.

Mike Coupe said his cost savings programme was running ahead of plan and he now expected savings of around £225m by the end of this financial year and £500m of cost savings over the next three years.

In the traditional prediction of Christmas fayre, the new CEO predicted Orkney Island dressed crab, the 'Taste the Difference' 18 Month Mature Cognac Laced Christmas Pudding and a hand-finished Taste the Difference Golden Bow Fruit Cake will be customer favourites this year.

Veteran City retail analyst Nick Bubb said the tone of what was an unusually detailed interim results statement was "so relentlessly upbeat that you have sometimes have to double-check that underlying profits did actually slump by 18% - on top of a 6% slip a year ago - and that the interim dividend has been slashed by 20%".

However, he conceded that underlying PBT was not quite as bad as the City had feared, despite the LFL sales decline and margin pressure.

A first look from Nomura before a 0930 analyst meeting suggested EBIT was £23m, or 7%, ahead of estimates primarily thanks to lower levels of investment in the proposition than expected, with cost savings in line with the second-quarter revisions and cost inflation appeared to have been slightly better than expected.

Nomura analysts also noted that LFLs were tracking a little ahead of its forecasts, which arguably validated these lower levels of reinvestment.

"Sainsbury continues to hold up towards the top end of the ‘Big 4’, rather than starting to be a share donor to the recoveries of Tesco and Morrison, so far, as we expected (this is all falling on Asda so far)."

Societe Generale was in general agreement: "The group appears confident in its own differentiation and strengthens, echoing the positive message delivered with Q2 sales. We think J Sainsbury is the best placed of the Big Four players to protect its market positions and profitability."

Clive Black at Shore Capital also dished out praise but left profit forecasts unchanged, looking for a slightly higher £575m than the Vuma consensus £573m, though he nudged up EPS expectations to 23.0p from 21.9p to reflect the lower tax guidance.

"Whilst far from immune to the growing presence of the limited assortment discounters (LADs), [Sainsbury] has proved to be more capable to withstanding its advances compared to its value orientated peers to date," he said.

Shares in Sainsbury's spiked higher initially but by 0955 were down 1.8% at 267.8p.