Sainsbury ‘licking self-inflicted wounds’ after results

The supermarket chain reported its first loss in 10 years after writing down the value of its property portfolio in full-year results to March 14.

Black, director of research at Shore Capital, said it was “unfortunate”​ that ceo Mike Coupe had taken the reins at Sainsbury in such challenging times when Sainsbury’s profits were under significant pressure.

Under the heading “licking self-inflicted wounds”​, Black said: “That pressure is partly self-inflicted, ‎to our minds … We have been concerned about the disconnect between superstore bosses and their customers for some time …​

“ … Despite extensive customer insight ​[via the retailer’s Nectar card scheme], signs of consumer distress or need and competitor preparedness to take on the incumbents in the form of the discount channel were ignored.”​

‘Chequered’​

The past 30 years had been “chequered”​ for Sainsbury – “a tale of stop and go”​. The business had never really recreated the lustre of the early 1990s when it was “characterised by being one of the most advanced and innovative supermarket chains in the world”​.

“Now, after a reasonably sustained period of progress, from a deeply debased level it should be ‎said under the control of Justin King, Sainsbury’s profit, earnings and dividend advances have, once again, stalled and retreated.”​

Having vowed to fight toe-to-toe with its competition, Sainsbury’s challenge over the next year was to conserve cash in the face of profit margin erosion, said Black.

As a result, it has committed to limiting capital expenditure to £550M and new store openings to one or two convenience stores a week. It is targeting cost savings of £200M in the next financial year.

Price cuts​

However, it is investing £200M in price cuts over that period, £50M above previous guidance. Black expressed “concerns”​ that an estimated £110M of costs associated with price-driven volume sales growth “appears to be new guidance”​ and would lead to Shore Capital downgrading forecasts of Sainsbury’s performance.

Analysts Edouard Aubin and Francois Halconruy of Morgan Stanley responded to Sainsbury’s full-year results by revising its pre-tax profit forecast for the next financial year down by 3% to £570M.

Sainsbury’s reduction of net debt in the past year to £2.34bn despite increasing capital expenditure to £947M was positive, as was the fact that it had improved retail working capital by £313M, they said.

However, the property write-down and the costs involved with Sainsbury’s Bank were blows, they said, adding: “Despite the significant price investments (deflation in the market running at c2% currently), Sainsbury highlights that volume growth has remained relatively low throughout the year, with consumers instead spending their extra cash on eating out or on big ticket items for the home.”​

For more detail on Sainsbury’s full-year results, click here​.