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Sainsbury's warns challenging UK market means long wait for profit growth
May 3, 2017 / 6:16 AM / in 6 months

Sainsbury's warns challenging UK market means long wait for profit growth

LONDON (Reuters) - British supermarket Sainsbury’s (SBRY.L) warned a challenging market meant it could take up to five years to deliver sustainable profit growth, despite a robust performance from general retailer Argos which it bought last year.

FILE PHOTO - Shopping baskets are displayed at a Sainsbury's store in London, Britain April 30, 2016. REUTERS/Neil Hall/File Photo

Sainsbury‘s, which trails market leader Tesco (TSCO.L) in annual sales, reported a third straight fall in annual profit on Wednesday, hurt by price cuts and cost inflation, and confirmed analysts’ forecasts for another decline in 2017-18.

Last year Sainsbury’s expanded in areas such as electrical goods when it bought Argos-owner Home Retail for 1.1 billion pounds, which it said has gone well so far.

“Our job is to build a business for the future,” said Chief Executive Mike Coupe, who outlined his strategy for the business two and a half years ago.

Shares in Sainsbury’s were down 5 percent at 265.5 pence at 1034 GMT, valuing the business at 5.8 billion pounds and taking the year on year decline to nearly 7 percent.

“The UK grocery industry is one of the most challenging, if not the most challenging, in the world ... (but) we think over a three to five year period we can deliver strong and steady profit growth,” he told reporters.

Sainsbury’s said Argos contributed a better than expected profit of 77 million pounds in the second half and would deliver a 160 million pounds boost to earnings six months early. It also said it would speed up a plan to open 250 Argos Digital stores in its supermarkets.

A shopper browses items at a Sainsbury's store in London, Britain, October 11, 2016. REUTERS/Neil Hall/File Photo

Sainsbury’s made an underlying pretax profit of 581 million pounds in the year to March 11, down from 587 million pounds made the year before. The average forecast by analysts was 578 million pounds.

The result reflected intense price competition, driven by German discounters Aldi and Lidl, as well as cost inflation, offset by cost savings of 130 million pounds and the contribution from Argos.

Group sales rose 12.7 percent to 29.1 billion pounds, but Sainsbury‘s’ own like-for-like sales fell 0.6 percent.

“Unlike its domestic rivals Tesco and Morrisons (MRW.L), like-for-like sales at Sainsbury’ have remained stubbornly negative recently. Lower prices, weaker margins and a falling market share. Not a good combination,” said George Salmon, equity analyst at Hargreaves Lansdown.

Morrisons and Tesco are both in turnaround mode after going through disastrous periods while Sainsbury’s market share has remained broadly stable over the last five years.

Some analysts believe Sainsbury’s is vulnerable to further price cuts by Tesco and a recovering Asda and the supermarket’s Chief Financial Officer Kevin O‘Byrne said he was comfortable with an average profit forecast of 573 million pounds for 2017-18, meaning a drop for yet another year.

Some analysts also say Argos increases Sainsbury’s exposure to the threat of Amazon [AMZN.O] and to higher import costs at a time when pressure on discretionary purchases is building as inflation grows and wage growth is muted.

Editing by Kate Holton and Alexander Smith

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