Shares in Sainsbury’s (SBRY), the UK's second-largest supermarket group by market share, fell 2.9% to 203p after it revealed a sharp increase in costs in the first half and a major shake-up of its Argos business.
Total retail sales for the period to 19 September were up 7.1% excluding fuel and 6.9% on a like-for-like basis, led by grocery sales up 8.2% and general merchandise up 7.4%. Digital sales were up an impressive 117% to £5.8 billion with grocery sales more than doubling.
However, there was less good news on costs, which included £290 million of additional expenses to protect customers and staff, and a further £438 million of one-off costs related to Argos store closures ‘and other strategic and market changes’.
That took the firm to a pre-tax loss of £137 million against a profit of £9 million in the first half of last year despite an ‘underlying’ profit of £301 million compared with £238 million last year.
STORE CLOSURES AND JOB LOSSES
Argos has been one of the big winners during lockdown, with sales up 10.8% in the first half despite standalone stores being closed for 12 weeks and 120 stores still not having reopened since March.
Due to the seismic shift to shopping online, Sainsbury’s plans to close 420 standalone Argos stores by March 2024 and add 150 stores within its supermarkets, where it already has 315 Argos outlets and 296 collection points.
Meanwhile the firm is shutting its fresh meat, fish and deli counters permanently, making more room in the aisles for packaged produce. These moves are likely to lead to the loss of 3,500 jobs and one-off costs of between £900 million and £1 billion between now and March 2024 on top of an annual capex spend of £700 million to £750 million over the same period.
MORE COMPETITIVE ON FOOD
New chief executive Simon Roberts said he wants to ‘put food back at the heart of Sainsbury’s’. The company has already lowered prices on over 1,500 everyday grocery products, ‘and we will do more of this, focusing on the staple products that our customers buy’ promised Roberts.
Its online sales have jumped from 7% of grocery sales in March to 17% but are bumping up against capacity with orders over Christmas expected to rise from 700,000 per week to 760,000 across home delivery and click and collect.
More investment is going to be needed to increase the online capability, part of which will come from Argos store closures and part from supermarket closures over the next two years.
INVESTORS UNMOVED
Almost lost in the trading update was an increase in earnings guidance with the firm now calling pre-tax profits up 5% on last year, ahead of consensus, on stronger than expected sales.
The company also declared an interim dividend of 3.2p per share plus a special dividend of 7.3p per share in lieu of the 'deferred' final dividend for the last financial year.
Despite the better short-term guidance, and cheer-leading by City analysts, investors seem more concerned about the level of investment needed to keep the firm competitive as shopping habits change.
