12th Nov 2014 08:16
LONDON (Alliance News) - J Sainsbury PLC Wednesday said it will cut costs and capital expenditure so that it can invest more in pricing, as it swung to a pretax loss in the first half of the year and revealed the extent of its struggles with the price war engulfing the UK supermarket sector.
Sainsbury's, the UK's third-largest supermarket chain by market share, reported a pretax loss of GBP290 million for the 28 weeks to September 27, compared with a pretax profit of GBP433 million in the same period the prior year.
It also warned it expects profitability to be lower in the second half than the first half, and expects like-for-like sales to be negative for the next few year.
"The UK grocery market is changing faster than at any time in the past three decades. We must evolve our business to meet the challenges this presents to ensure we continue to win for customers, colleagues and shareholders," the grocer said in a statement.
Sainsbury's said it will invest a further GBP150 million in pricing, half of which will fall in the second half of the current financial year, and the rest in the first half of the next financial year. It said its will focus on areas its customers tell them "price matters most".
The supermarket also said its will be improving the quality of its 3,000 own-brand product range, as well as grow its non-food business, by increasing non-food space in its supermarkets and rolling out clothing online in 2015.
"Around 75% of our stores are in the right locations and are of the right size for our food and non-food offer and we will pilot new formats... Over the next five years, around 25% of our store portfolio will have some under-utilised space which can be used to expand our non-food offer or for other purposes such as carefully selected concession partnerships," Sainsbury's said.
It said it will open 500,00 square feet of new space each year for the next two years, and reduce it to 350,000 square feet the year after. It said over half of the new space will be convenience stores, as it still targets opening 100 convenience stores a year.
Sainsbury's said it swung to a loss after booking GBP665 million in impairments and onerous contract charges during the period. Excluding these charges, its underlying pretax profit was still lower than the prior year, at GBP375 million, down from GBP400 million a year earlier.
"We have impaired a number of our trading stores and have also decided to withdraw from a number of schemes in our property pipeline that are unlikely to achieve an appropriate return on capital," it said.
Sainsbury's said that it will maintain its competitiveness on price versus its main supermarket peers, by working in "close partnership with its suppliers to deliver value chain efficiencies which can be reinvested in price".
"In order to execute this strategy, it is essential that we maintain the strength of our balance sheet. We will therefore be cutting our capital expenditure and making significant cost savings, as well as ensuring we pay an affordable dividend," said Chairman David Tyler in the statement.
This includes reducing capital expenditure to between GBP500 million and GBP550 million a year over the next three years, accounting for roughly 2% of sales.
The grocer maintained its interim dividend at 5.0 pence per share, the same as last year, and said it will fix its dividend cover at 2.0 times its underlying earnings for 2014/15 and the next three years.
"Our dividend for the full year is likely to be lower than last year, given our expected profitability," said Tyler.
Current analysts consensus is for Sainsbury's to report an underlying pretax profit of around GBP677 million for the full financial year.
"Given the price investment announced today, combined with the outperformance of both the Bank and cost savings in the first half that we do not expect to be repeated in the second half, Sainsbury's expects profitability to be lower in the second half than the first half," the supermarket chain said in its statement.
Sainsbury's reported a 0.1% fall in group first-half revenue to GBP12.67 billion, down from GBP12.68 billion last year. Like-for-like sales were down 2.1% excluding fuel, as its sales decline accelerated in the second quarter.
"We expect supermarket like-for-like sales in the sector to be negative for the next few years, but we have robust plans to address this challenge," Sainsbury's said.
Prior to these declines, Sainsbury's had been enjoying 36 quarters of growth on a like-for-like basis, meaning nine years of unbroken sales growth. Last year, first-half like-for-like sales excluding fuel were up 1.4%.
Outside its food business, Sainsbury's said its on track to deliver sales and profit growth at Sainsbury's Bank and has "opportunities" to expand the Bank's product portfolio.
Sainsbury's shares were up 0.5% at 270.70 pence early Wednesday.
By Rowena Harris-Doughty; [email protected]; @rharrisdoughty
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