By James Davey
LONDON (Reuters) – Sainsbury’s <SBRY.L> put cost cutting and paying off debt at the heart of a new plan designed to show the British supermarket group can prosper on its own after a botched attempt to take over rival Asda <WMT.N>.
CEO Mike Coupe has been under pressure to deliver a strategy update after the 150-year old group saw its 7.3 billion pound bid for Walmart-owned Asda blocked by Britain’s competition regulator in April, and with its shares down a third in a year.
His new plan, unveiled ahead of a investor event at a store in Southampton, southern England, also involves moving more Argos general merchandise stores into Sainsbury’s supermarkets, increasing its number of convenience stores and refocusing the group’s financial services business.
It came as Sainsbury’s also reported improved trading in its latest quarter and maintained its full year profit guidance, sending its shares up about 2%.
“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,” said Russ Mould, investment director at AJ Bell.
Sainsbury’s said it would reduce costs by about 500 million pounds over five years as its brings its various businesses closer together. That’s in addition to ongoing savings to cover cost inflation.
The group, which reported net debt of 1.64 billion pounds in May, increased its three year debt reduction target to at least 750 million pounds, from 600 million previously. It forecast a reduction of at least 300 million in the current fiscal year.
A store estate review will result in about 10 new supermarkets and 10-15 closures; about 80 new Argos outlets in Sainsbury’s stores and 60-70 Argos closures, with 110 new convenience stores and 30-40 closures.
The closures are expected to deliver a profit benefit of about 20 million pounds per year, while the one-off cost of closures and impairments would be 230-270 million.
In financial services, the group will stop selling new mortgages and will not inject any more capital after 35 million pounds in 2019-20. It aims to double the division’s profit.
Sainsbury’s also agreed a new plan for its pension scheme, with its cash contribution reduced by 50 million pounds a year and the 2018 triennial valuation deficit reduced to 538 million pounds, from 1.055 billion pounds in 2015.
“We are confident that we can grow sales and sustainably fund investment in our value, service, store estate and digital proposition,” Sainsbury’s said, adding its dividend policy was unchanged.
The group said its like-for-like sales, excluding fuel, fell 0.2% in the 12 weeks to Sept. 21, its fiscal second quarter. While that was a fourth straight quarter of decline, it was an improvement on the previous quarter’s 1.6% fall.
Sainsbury’s is cutting prices on daily essentials while investing in stores, technology and online services to meet the challenges of a fast-changing industry, where customers are shopping more frequently, buying more online and also flocking to discounters Aldi and Lidl.
Sainsbury’s forecast 2019-20 underlying pretax profit would be in line with analysts’ consensus expectations of 632 million pounds. But it warned first half profit would fall by about 50 million pounds due to the phasing of cost savings, unseasonal weather, a strong comparative period and higher marketing costs.
(Reporting by James Davey, Editing by Paul Sandle and Mark Potter)