6th May 2015 14:42
LONDON (Alliance News) - J Sainsbury PLC Wednesday reported its first pretax loss for a decade as it joined bigger rival Tesco PLC in booking huge property writedowns due to its curtailed expansion plan and as it counted the cost of the price cuts it's having to make in response to changing UK shopping habits and the challenge of German discount grocers.
The supermarket chain reported a pretax loss of GBP72 million for the year ended March 14, compared with a pretax profit of GBP898 million the year before, as it booked a charge of GBP287 million to account for sites that it will no longer develop and a GBP341 million charge for stores that are unprofitable or only slightly profitable.
Excluding GBP753 million of charges that also included GBP15 million of restructuring costs, its underlying pretax profit fell to GBP681 million from GBP798 million as sales declined to GBP26.1 billion from GBP26.4 billion.
The property impairment occurred in the first half of the year during a reassessment of the supermarket's store pipeline and decision to withdraw from development of some planned sites. Chief Financial Officer John Rogers told journalists that he doesn't foresee "the need for any more property impairments" in the near future.
In November, Chief Executive Mike Coupe revealed his strategy to invest GBP150 million a year in price cuts for the next three years, resulting in price reductions in over 1,100 products. GBP50 million was invested in the second half of the year and a further GBP150 million is expected to be invested in the current financial year, increasing the overall price investment to GB200 million.
Sainsbury's also plans to make GBP500 million in cost savings over the next three years, with a target of GBP200 million for the current financial year.
The grocer said it has seen a 6% improvement in sales volume following the price cuts, which it believes will put it ahead of its competitors amidst a price war in a deflationary food market.
?We will match our competitors toe-to-toe, our prices have never been better,? Coupe told journalists on Wednesday, adding that he believes the supermarket has the financial capacity and flexibility to maintain that position and to respond if "price moves go further".
However, sales growth in the industry is still expected to decline in an "extremely challenging" market, according to Rogers.
?The underlying pressures of the industry will remain from a deflation point of view and therefore we would expect that the underlying sales growth of the industry will be negative for the foreseeable future,? Rogers said.
The UK's third-largest retailer has been the best-performing of the three listed supermarket groups in the last few years, and the scale of its loss is nowhere near that of Tesco. However, the fact that Sainsbury's is now also in the red shows the extent to which the country's main grocers are suffering as shoppers increasingly do smaller, cheaper shops, and after the challenge of Aldi and Lidl caused a price war in the broader sector, driving down prices.
Kantar Worldpanel, which takes snapshots of the industry every 12 weeks, said a typical basket of everyday items is now 2.1% cheaper that it was in 2014, as it reported lower till rolls and lower market share for all four of the major supermarkets in its latest 12 week survey period. Sainsbury's till roll actually declined the least compared with Tesco, Wm Morrison Supermarkets and Asda, in that period, down 0.2%.
Rogers said he thinks that Aldi and Lidl's recent growth will slow down due to "saturation" in their existing estates. "They are getting to a point in much of their existing estates where it's difficult for them to trade any harder," he said.
Coupe said he is "even more confident" of his price strategy now than at the time of its inception in November, and said there are "green shoots" for the company as he referred to the recent sales volume improvement. Coupe added that the price gap between discounters and bigger supermarkets would "significantly reduce".
"The UK marketplace is changing faster than at any time in the past 30 years which has impacted our profits, like-for-like sales and market share. However, we are making good progress with our strategy, and our investment in price and quality is showing encouraging early signs of volume and transaction growth," the CEO said in a statement.
Sainsbury's will pay a full-year dividend of 13.2 pence per share, down 24% from the 17.3p paid last year. It said its dividend cover will be fixed at two times its underlying earnings in the current year.
Shares in Sainsbury's were trading down 3.8% at 264.60 pence Wednesday afternoon, making it the second-worst performing stock in the FTSE 100 on the day.
Analysts were mixed on the results, citing concerns that a fightback by Tesco, the UK's largest supermarket by market share could hit Sainsbury's.
Panmure Gordon analyst Mike Dennis said that, in a very competitive industry, the results looked good compared with those of Waitrose or Tesco. The analyst thinks investors should now focus on whether Sainsbury's can reduce costs further, execute on its price simplicity strategy, and maintain trading margins at 3% this year.
"Sainsbury's need to find cost savings to offset Tesco's 'Reset' plan to invest in price and availability."
Societe General analyst Arnaud Joly said the bank thinks Asda and Sainsbury's, amongst the big four grocers, are well positioned to protect their market positions thanks to Asda's focus on 'value' and Sainsbury's focus on 'quality'.
Panmure Gordon and SocGen are both retaining Hold recommendations on the stock.
Meanwhile, Shore Capital remains cautious and retains its Sell recommendation for J Sainsbury.
"That caution reflects, to a considerable extent, our uncertainty and worry that Sainsbury has not yet reached the end of its downgrade cycle. In particular, we are concerned that a revitalising Tesco may hit Sainsbury's trading patterns, respecting the fact that Sainsbury is not standing still into this headwind," said analyst Clive Black.
By Karolina Kaminska; [email protected] @KarolinaAllNews
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