J Sainsbury PLC (LON:SBRY) has unveiled plans to slash costs by closing weaker stores and said it expects underlying profit for the first half of 2019 to be £50mln lower than last year.
Sales in the second quarter saw an uplift, as recent industry data had indicated, with total sales up 0.1% and like-for-sales down 0.2% compared to the LFL decline of 1.6% in the first quarter.
“Sales momentum was stronger in all areas and we further improved our performance relative to our competitors, particularly in grocery,” said chief executive Mike Coupe.
Closing 100 shops
As part of a planned strategy rejig, the FTSE 100-listed supermarket group said it aims to trim admin costs by £500mln over five years.
There will be one-off costs and balance sheet impairments of £230mln-£270mln from the closure of 10-15 supermarkets, 60-70 Argos stand-alone stores and 30-40 convenience stores, while investment plans include the addition of 10 new supermarkets, around 80 new Argos outlets in Sainsbury's supermarkets and around 110 new convenience stores.
But the grocer held back from selling off the mortgage book of its loss-making Sainsbury’s Bank, as some had predicted, but said it would immediately stop new mortgage sales, make no more capital injections and look to cut costs as part of a plan to double underlying profit before tax from financial services in five years.
Sainsbury’s also revealed that the triennial valuation of its pension scheme showed the deficit had almost halved to £538mln, allowing it to snip cash contributions immediately by around £50mln.
While underlying PBT is expected to fall in the first half, which was blamed on restructuring costs, “unseasonal weather” and higher marketing costs, roughly as predicted by City analysts, management was confident the group will still hit its full-year profit target as comparisons with last year ease in the second half.
Shares in the group rose 1.5% to 216.1p in early trading on Wednesday.
Turning around the juggernaut
Progress is being made one small step at a time, said Russ Mould, investment director at AJ Bell, with a plan in place but the hard part being to execute it.
“Retailing is about giving customers what they want, how they want and at the right price. Management also need to make sure the business is running efficiently both in terms of making a profit and customers have a smooth experience when doing their shopping."
He found the latest sales data encouraging and the rise in the share price showed investors liked the new ways of cutting costs.
“Chief executive Mike Coupe should be pleased that there are green shoots of a recovery, particularly after all the criticism he received over how the failed Asda merger distracted management from the day-to-day running of Sainsbury’s.”
Richard Hunter at Interactive Investor said the strategic review "will need careful management" in the notoriously competitive sector where companies mid-transformation can get left behind.
He also noted that planned debt reduction, where the target was upped to at least £750mln from £600mln, along with the cost cutting "should free up additional cash flow which, apart from allowing further investment into its convenience store chain which has been successful to date, should also result in the comfortable dividend cover being maintained".
-- Broker comment added and share prices updated --