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Sainsbury's on the back foot as it lowers interim dividend and posts profit decline

Sainsbury expects to deliver at least £500mln in cost savings over three years from fiscal year 2018/19
Sainsbury has been hit by rising cost inflation and tough competition

J Sainsbury plc (LON:SBRY) slumped as it lowered its interim dividend and posted a 9% decline in profits, reflecting price cuts, wage inflation and the consolidation of Argos.

Underlying profit before tax fell to £251mln in the 28 weeks to 23 September as the supermarket price war raged on amid fierce competition.

READ: Sainsbury's to slash 2,000 jobs to cut costs as it competes with Aldi and Lidl

The price war between the so-called big four supermarkets, including Sainsbury’s, Tesco (LON:TSCO), WM Morrison Supermarkets PLC (LON:MRW) and Asda, started because discount grocers Aldi and Lidl have been taking away market share.

Adding pressure on supermarkets' margins, a Brexit-driven devaluation of the pound has pushed the cost of food imports higher.

Sainsbury’s retail underlying operating margin fell by 58 basis points to 1.89% in the first half as retail underlying operating profit decreased by 11.7% to £272mln due to cost inflation, investment in customer offers and the consolidation Argos losses. 

"A slow summer has dragged down profits at Sainsbury’s, which is battling industry-wide headwinds in the retail sector," said Laith Khalaf, senior analyst at Hargreaves Lansdown.

"Consumer spending is under pressure from higher inflation, while it’s costing supermarkets more to fill their shelves with stock."

The acquisition of Argos last year, however, boosted sales during the period with total sales up 17% to £16.3mln. On a like-for-like basis, excluding fuel, sales rose 1.6%.

Supermarkets adapt to change

Sainsbury's has opened a further 73 Argos concessions in its stores in the past six months, bringing the total to 112, and plans to have 165 by Christmas.

"The supermarkets are going through a period of reinvention as they try to adapt to changing shopping habits," Khalaf said.

"Tesco is looking to buy Booker Group, Morrison’s has partnered up with McColl’s and Amazon, and Sainsbury’s big chess move was the purchase of Home Retail Group last year."

Sainsbury cuts costs

Chief executive Mike Coupe said the company has been collaborating with suppliers to reduce costs and limit the impact of price inflation on customers.

The group expects to deliver at least £500mln in cost savings over three years from fiscal year 2018/19.

Sainsbury’s cut its dividend by 14% to 3.1p from 3.6p last year, in line with its  policy to pay 30% of the previous full year dividend.

“We have delivered a good performance across the group in the last six months, with more customers choosing to shop at Sainsbury's in the first half than ever before,” said Coupe. “We are now three years into delivering our differentiated strategy and are seeing clear results."

Shares fell 1.88% to 229.10p in afternoon trading.

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