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Sainsbury's profits drop as it takes hit related to proposed Asda merger

Sainsbury's continues to expect full-year underlying profit to meet market forecasts
First-half like-for-like sales increased 0.6%

J Sainsbury plc (LON:SBRY) posted a 40% drop in pre-tax profit for the first half, reflecting costs stemming from its proposed merger with Asda, the integration of Argos and the restructuring of its retail operations.

Pre-tax profit fell to £132mln in the six months to September 22 from £220mln the same period a year ago.

The chain took a £17mln charge related to its plans to buy Walmart Inc’s Asda in a £7.3bn deal that would see the combined company take over from Tesco PLC (LON:TSCO) as the UK’s biggest supermarket group.

The Competition and Markets Authority is currently conducting the second phase of its investigation.

"Clearly the big game-changer for Sainsbury’s is the proposed merger with Asda, and the success of the Argos integration shows Mike Coupe and his team are able to spot M&A opportunities and execute them well," said Laith Khalaf, senior analyst at Hargreaves Lansdown.

"The prospect of rolling out further Argos outlets within Asda’s store network is a tantalising prospect, though the pressing question now is what hoops the competition regulator might ask the supermarkets to jump through before they can tie the knot."

READ: CMA’s Asda-Sainsbury’s merger inquiry to consider possible “squeeze” on suppliers

The integration of Argos, the catalogue retailer Sainsbury’s bought in 2016, resulted in a £25mln hit to profits while restructuring charges amounted to £69mln.

Sainsbury’s also incurred a £40mln charge in moving its bank to a new platform, completing the final phase in the transition to a standalone bank after buying the rest of the stake it does not already own from Lloyds Banking Group PLC (LON:LLOY) in 2013.

Sainsbury’s Bank was previously reliant on the systems of Lloyds, which used to own a 50% stake in the lender.  The bank was formed 16 years as a joint venture between Sainsbury's and Bank of Scotland, which became part of Lloyds in 2009.

Excluding exceptional charges, underlying profit before tax gained 20% to £302mln from £251mln last year as the acquisition of Argos delivered financial benefits ahead of schedule.

Hot summer boosts food and general merchandise sales

Group sales edged up 3.5% to £16.8bn from £16.3bn.

Retail sales, excluding fuel, up 1.2%, as a 1.2% rise in grocery sales and 1.5% increase in general merchandise offset a 1% decline in clothing sales.

Like-for-like sales, excluding fuel, increased 0.6%, or 3.0% including fuel.

Sainsbury’s said a hot summer boosted sales of food and general merchandise, including garden furniture, outdoor games and barbeques. However, margins in general merchandise were dragged lower by strong sales of lower margin consumer technology products.

The total retail underlying operating margin still rose 36 basis points to 2.25% on the back of synergies from Argos.

“Half year like-for-like sales growth of 0.6% for Sainsbury’s may show an acceleration from the 0.2% growth reported in the first quarter, yet it still seems disappointing when you consider the period included the very hot summer which should have driven additional business for the supermarket and its Argos chain," said Russ Mould, investment director at AJ Bell.

He added: “So why hasn’t sales growth been a lot better? First of all, the company has been cutting prices to stay competitive. It also appears to have had some operational issues as the general public has flooded social media for months with pictures of empty shelves in stores across the country."

Sainsbury's maintains full-year guidance as it expects to reach cost savings target 

For the 2018/19 fiscal year, Sainsbury's expects cost inflation of about 3% but said it was on track to deliver £200mln in cost savings after achieving £121mln in savings in the first half. It is targeting cost savings of at least £500mln over the next three years as part of its plan to simplify the business.

The group expects to open three new supermarkets, up to 15 new convenience stores and 90 Argos stores in its supermarkets in 2018/19.

The company said its estimate for full-year underlying profit remains in line with market forecasts of £634mln but cautioned that grocery, general merchandise and clothing markets "continue to be highly competitive and very promotional".

In mid-morning trading, shares dipped 0.16% to 318.60p. 

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