J Sainsbury plc (LON:SBRY) reported an 18% decline in full year pre-tax profits on Monday but its shares surged as it confirmed a deal to merge with Walmart Inc’s (NYSE:WMT)’s Asda.
Pre-tax profit fell to £409mln in the year to 10 March 2018, from £504mln last year, reflecting a £180mln charge related to a restructuring of its store operations, the integration of Argos and transition costs for Sainsbury’s Bank’s new banking platform.
Excluding items, underlying pre-tax profit rose 1.4% to £589mln from £581mln last year on the back of £185mln in cost savings and sales growth.
Groups sales increased 9% to £31.8bn from £29.1mln. On a like-for-like basis, excluding fuel, sales edged up 1.3% mainly as a result of higher inflation.
As part of its restructuring, the supermarket closed 15 of its underperforming supermarkets last year but opened three new supermarkets and 24 new convenience stores.
Overall, it reduced its space to 23.2mln square feet from 23.3mln last year.
Argos sales fall as weak consumer confidence hits retailers
Argos – the catalogue retailer Sainsbury’s acquired in 2016 – was hit by a tough retail market as hard-hit consumers cut back on spending.
Sales in general merchandise, which includes Argos, fell 0.8%.
Grocery sales climbed 2.3%, driven by growth online and at convenience stores along with an improvement at supermarkets.
Clothing sales, which includes the Tu range, grew 3.8%.
Sainsbury's Bank margins hurt by competitive market
Sainsbury’s Bank delivered an 11% rise in underlying profits to £69mln and a 30% jump in total income to £451mln, boosted by the first full year contribution from Argos Financial Services (AFS).
The net interest margin rose 50 basis points (bps) to 4.9%, including AFS.
Excluding AFS, however, the net interest margin fell by 30bps to 3.6% with the company blaming a competitive unsecured lending market.
Sainsbury’s said it has decided to take a “more cautious approach” to unsecured lending next year and margins will reduce in a competitive market.
The group warned that it expects Sainsbury's Bank profits to reduce to around £30mln in fiscal year 2018/19 due to the impact of new IFRS 9 accounting standards and interest payments on capital raised in November.
The common equity tier 1 capital ratio was lifted 80 bps to 14.1%.
Sainsbury's to achieve further cost savings
Looking ahead, Sainsbury’s expects to deliver a further £500mln of cost savings over the next three years to 2020/21. It plans to open 90 more Argos stores in Sainsbury’s supermarkets in the current fiscal year after opening 191.
The group also expects to open two new supermarkets and about 15 new convenience stores.
Sainsbury’s will close remaining Argos stores within the struggling Homebase chain.
The final dividend was raised by 7.6% to 7.1p as the company reduced net debt by £113mln to £1.3bn.
Sainsbury's agrees to merge with Asda
The results were overshadowed by news Sainsbury’s will merge with Asda in a deal worth £15bn.
READ: Sainsbury's confirms £15bn Asda merger and dismisses reports stores will close
The enlarged group is expected to deliver cost savings of £500mln by opening Argos in Asda stores and through operational efficiencies.
Shares in Sainsbury's jumped 17% to 317p in morning trading.