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Sainsbury's warns over increasing costs as profits fall 10% to £277m

Published 09/11/2016

Sainsbury's boss Mike Coupe said the group had made 'good progress' amid 'challenging' trading conditions
Sainsbury's boss Mike Coupe said the group had made 'good progress' amid 'challenging' trading conditions

Argos owner Sainsbury's has posted a 10% fall in half-year profits and warned of an even tougher second half for its supermarket chain in the face of surging costs.

The group said it would continue to cut prices for shoppers, but cautioned that the impact of the plunging pound on prices was "uncertain" as it braces for an increase in costs over its second half.

Sainsbury's reported underlying pre-tax profits of £277 million for the six months to September 24, down from £308 million a year earlier.

Bottom line pre-tax profits rose 9.7% to £372 million.

It said second-half profits excluding Argos and Habitat owner Home Retail Group - snapped up earlier this year for £1.4 billion - were expected to be lower due to "continued price investment and a step-up in cost inflation in the second half".

Full-year results overall are set to be in line with market expectations thanks to a boost of between £55 million and £75 million f rom Home Retail in the second half.

Sainsbury's chief executive Mike Coupe said the group had made "good progress" on its turnaround strategy against "challenging" trading conditions.

But the group added: "The market remains competitive and pricing pressures continue to impact margins.

"The full impact of the devaluation of sterling on retail prices is as yet uncertain."

Sainsbury's saw profits come under pressure after like-for-like supermarket sales dropped 1% in the first half, with the sector still battling an intense price war.

The falling pound is putting even more pressure on the big players as suppliers begin to demand price increases, with Tesco and Marmite group Unilever embroiled in a recent spat over prices.

Sainsbury's said it was on track to make savings of £500 million by 2017/18 and set a new three-year target to slash costs by another £500 million from 2018/19.

The group already has 22 Argos digital stores in its supermarkets and plans to extend this to 30 by Christmas as well as creating a further 30 Argos digital collection points in its supermarkets.

It hopes to ultimately roll out 200 new digital collection points overall across its stores, where customers can collect Tu clothing, eBay and DPD parcels.

Shares fell more than 5% amid wider market falls.

Analysts at Shore Capital said: "Sainsbury's grocery business is undoubtedly finding life tougher going now than has been the case for some years."

But they said the update - the first including Home Retail figures - was "encouraging", with the deal "on track" in terms of cost savings and integration.

While overall supermarket sales remained under pressure, Sainsbury's posted growth of nearly 5% for its general merchandise ranges, with clothing up almost 1%.

Argos contributed 2.5% to like-for-like sales growth in the first half, with overall retail sales across the whole Sainsbury's group 2% higher.

Sainsbury's has now merged its clothing and general merchandise offerings with that of Argos and Habitat, creating a £6 billion turnover business.

It now has more than 90,000 products across food, clothing, general merchandise and financial services.

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