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Sainsbury's warns of cost pressures as profits dip to £503m

Supermarket Sainsbury's has warned over a hit from falling consumer confidence as price hikes start to bite after it suffered its third straight year of falling profits.

The chain said the squeeze on household spending was impacting general merchandise and clothing sales growth as Brexit-fuelled inflation outstrips wage increases.

Shares fell 5% after it reported an 8.2% drop in bottom line profits to £503 million for the year to March 11, while underlying profits fell for the third year in a row, down 1% to £581 million.

Sainsbury's revealed profits were knocked as it sought to keep prices low amid cost pressures from the Brexit-hit pound and higher staff wages.

This was only partly offset by a £77 million boost from the recently bought Argos chain, snapped up last year when it took over Home Retail Group for £1.4 billion.

Sainsbury's is forecasting cost price inflation of 2% to 3% over the financial year ahead.

While this is providing a welcome fillip for under-pressure food sales, "general merchandise and clothing sales growth have been impacted by reduced consumer confidence and a marked slowdown in real pay growth", according to the group.

It said the grocery market remains "competitive and the impact of cost price pressures remains uncertain", with like-for-like supermarket sales down 0.6% over the year.

The figures laid bare the impact of the tough market on its core supermarkets, which saw sales fall by nearly 2%, while convenience store sales were up 6% and online groceries lifted 8%.

Chief executive Mike Coupe said the past year had been "one of the most interesting and challenging and volatile years in my working lifetime".

He said the group was working hard to keep prices low for consumers and was cutting costs to offset this and the cost pressures of higher wages.

Sainsbury's said it made cost savings of £130 million as part of a three-year target to cut £500 million by the end of 2017/18.

It also outlined aims to slash costs by another £500 million in the next three years.

But the higher costs, together with seasonal losses expected from Argos, are expected by the group to see first-half profits in the new financial year come in lower than the second half.

Mr Coupe insisted its food business remained "resilient in a challenging market".

He added: "This has been a pivotal year and we have made significant progress delivering and accelerating our strategy."

Group sales, including VAT, surged 12.7% thanks to a robust contribution over the final six months from the Argos business , which notched up a 4.1% sales rise.

Mr Coupe said the group was "pleased" with its progress so far since snapping up Argos, having already opened 59 Argos Digital stores in its supermarkets, which it said were performing well.

Separate figures also out on Wednesday from Kantar Worldpanel suggested a more recent boost from the late Easter for Sainsbury's, revealing a 1.7% hike in sales over the 12 weeks to April 23 - its best performance for nearly three years.

But faster growth from its main rivals saw Sainsbury's lose market share over the quarter, to 16.1% from 16.5% a year earlier, according to Kantar.

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