Sainsbury's suffers profits wipe-out

Sainsbury's has shocked the market with a first annual loss since former boss Justin King turned the group around a decade ago. Clearly, the heavyweight grocers are still paying the price for past complacency, and remain in a dogfight to protect market share. The dividend is slashed, too, and a 4% slump in the share price suggests the City is unsure whether or not to back Sainsbury's new boss Mike Coupe.

Last year's £898 million profit turned to a £72 million loss in the 52 weeks to 14 March following weaker sales, price cuts and £713 million of charges - mainly the £628 million property write-down first flagged in November.

Reported sales fell 0.7% to £23.8 million, although strip out the one-offs and underlying pre-tax profit fell a more modest 15% to £681 million, helped by cost savings of £140 million. That, however, is not good enough to keep the dividend safe. Committed to fixing dividend cover at two times underlying earnings for the next three years, the supermarket chain had to cut the final payout by a third to 8.2p, taking the full-year total to 13.2p, down 24%.

"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," explained Coupe. "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. "

Sainsbury's had been tipped to be the main beneficiary of Tesco's struggles as consumer confidence recovered and household income increased. Instead, its market share has fallen to 16.5% despite investing £50 million in price cuts on over 1,100 products last year. It will spend another £150 million this year.

Opening 98 express stores in an effort to tap into changing shopping habits - buying less more often and online - cost Sainsbury's £947 million, although its core retail capital expenditure budget will shrink to £500-£550 million a year for the next three. However, at 1.7% last year's contribution to group sales missed the company's own estimates. Like-for-like sales fell by 3.6%.

Accendo Market's Augustin Eden reckons the problem lies firmly with changing consumer habits.

"Increasingly cash-rich consumers in an environment of 0% inflation and low interest rates are evidently not only turning to Aldi and the discounters. They're doing the opposite too - splashing out on takeaways and dining out at restaurants instead of cooking and, let's face it, washing up afterwards. With the monster weekly shop swiftly morphing into the daily visit to the local grocer (or curry house), a considerable re-balance is occurring in the market. Where it will settle next is anyone's guess."

Still, Brewin Dolphin analyst Nicla Di Palma remains optimistic. "This remains the best performance amongst the three listed Food Retailers by far. Sainsbury's continues to do the right thing for the business, investing in quality, in its non-food offer and in convenience."

Despite today's weakness, Sainsbury's shares remain within the 260-280p trading range of the past four months. Evidence of progress will be needed to justify any sustainable breakout.

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