May 13, 2009 / 6:22 AM / 11 years ago

Sainsbury's profit rises 11 percent

LONDON (Reuters) - J Sainsbury, Britain’s third-biggest grocer, posted an 11 percent rise in annual profit and said it was pressing ahead with expansion in non-food ranges and convenience stores despite the recession.

A woman walks past a Sainsbury's store in central London March 25, 2009. J Sainsbury, the country's third-biggest supermarkets group, posted an 11 percent rise in year profits Wednesday and said it was speeding up its expansion into convenience stores. Luke MacGregor/REUTERS

Chief Executive Justin King said on Wednesday the 140-year-old group had moved from recovery to a period of sustained growth. He also dampened speculation he might soon leave to head up his former employer, Marks & Spencer.

“We have the greatest growth potential of any grocery retailer in the next 10 years,” he told reporters. “I can’t see myself anywhere else other than leading that.”

King said the potential lay in catching up on the group’s past mistakes, such as being slow to open new stores and move into non-food ranges, rather than following market leader Tesco abroad or in a big expansion into banking.

Sainsbury, with over 500 supermarkets and more than 275 convenience stores, said it made a pretax profit before one-off items of 543 million pounds in the year to March 21, topping analysts’ median forecast of 537 million pounds.

Sales rose 5.7 percent to 20.4 billion pounds as the firm used its mid-market positioning to take custom from upmarket rivals like Marks & Spencer and Waitrose, while also attracting budget-focussed shoppers with innovative campaigns like “Feed you family for a fiver” and “Switch to save” on own-brand goods.

The dividend was lifted 10 percent to 13.2 pence.

King said customer numbers had risen to 18 million a week from 14 million when he joined five years ago.

But some analysts are critical of the improvement in profitability. Sainsbury’s underlying retail profit margin — up 26 basis points to 3.26 percent — lags rivals, due largely to its higher rent bill. Tesco’s UK trading margin is 6.2 percent.

Finance Director Darren Shapland said he expected a little bit of an improvement in operating margin this financial year, and that he was comfortable with analysts’ consensus profit forecast for 2009-10 of about 575 million pounds.

Sainsbury’s shares dipped 2.8 percent to 330.75 pence in early trade. By 3:30 p.m. they were down 0.6 percent at 338.25 pence, outperforming a 1.5 percent decline on the DJ Stoxx European Retail Index.

The stock trades at 15.1 times forecast earnings for 2009-10, above Tesco on 10.5 times and Wm Morrison Supermarkets on 11.4 times, according to Reuters data.

Execution analyst Caroline Gulliver said the combination of low margins and high share price valuation were behind her “sell” rating on the stock — “particularly against slowing food price inflation and a potentially stronger competitive threat.”

Last week, market leader Tesco announced a 150-million pound investment in its Clubcard customer loyalty plan.

EXPANSION

UBS analysts, however, were impressed with “another solid set of numbers from the increasingly dependable Sainsbury.”

Sainsbury said it planned to increase selling space by 5 percent in 2009-10, or about 850,000 square feet, up from 4 percent in 2008-9, and at least match that growth in the future.

Around half of the new space will be allocated to non-food ranges following the success of the group’s TU clothing brand, and it will launch a non-food online site in the coming weeks.

It will also open 50 convenience stores this year and 100 in 2010-2011 to tap trends for more frequent and local shopping.

Rivals are also expanding rapidly, and King conceded competition would be tough.

“If you added up the ambition that everybody has laid out, that probably all can’t be achieved. It adds up to more than the amount of growth this market has typically seen over the last 10 to 20 years,” he said.

But he was confident Sainsbury could deliver good returns on its plans because of its strong sales performance and the fact much of its new space will be store extensions.

Customers are seen outside a Sainsbury's store in London November 12, 2008. J Sainsbury, the country's third-biggest supermarkets group, posted an 11 percent rise in year profits Wednesday and said it was speeding up its expansion into convenience stores. REUTERS/Alessia Pierdomenico

Sainsbury said it was looking for a new chairman to replace Philip Hampton who recently took the helm at Royal Bank of Scotland. Hampton described the search as “advanced.”

The group said its bank joint venture with Lloyds swung to a post-tax profit of 4 million pounds after a loss of 3 million the year before, and had seen 4,000 customers a week signing up for an internet saver account launched in February.

Editing by Greg Mahlich and Dan Lalor

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