Restructuring unveiled

Sainsbury’s axes mortgages and announces stores shake-up

Sainsbury's Bank hq

Sainsbury’s Bank at the Gyle: no more mortgages will be offered

Sainsbury’s is to stop offering mortgages and is embarking on a restructure of its stores portfolio which see some close but the overall number increase.

The supermarket group said it expects first half underlying profit before tax to reduce by c.£50m year on year because of the combined impacts of the phasing of cost savings, unseasonal weather against a strong comparative period last year, as well as higher marketing costs.

It announced an immediate halt to offering new mortgages through Edinburgh-based Sainsbury’s Bank which is understood to have put its mortgage book up for sale.

The bank will receive no further capital injections after £35m allocated this year. It wants to reduce its cost to income ratio to c.50%.

It will close up to 40 convenience stores, between 10 and 15 supermarkets and as many as 70 Argos stores as it restructures the business following the collapse of its planned merger with Asda.

There will be 10 new supermarkets; 80 new Argos in Sainsbury’s and 110 new convenience stores.

The company said it had a “unique opportunity” to structurally reduce costs by c.£500m over five years as it brings the businesses together, in addition to ongoing cost savings to cover the impact of cost inflation.

Despite the fall in first half profits, it expects to benefit in the second half from the annualisation of last year’s staff wage increase and a normalisation of marketing costs and weather comparatives.

“Therefore, while retail markets remain highly competitive and the consumer outlook remains uncertain, we remain on track to deliver full year 2019/20 underlying profit before tax in line with consensus expectations,” it said.

Sainsbury’s expects the store closures to deliver an ongoing net operating profit benefit of c.£20m per year. It believes the one-off cost of closures and impairments to be £230m to £270m, of which the cash cost will be £30m to £40m.

We further improved our performance relative to our competitors

– Mike Coupe

The company said second quarter total retail sales were up 0.1% (excl. fuel), with like-for-like sales down 0.2% (excl. fuel). Grocery sales increased by 0.6% while general merchandise sales declined by 2% and clothing sales increased by 3.3%.

Mike Coupe, chief executive, said: “Sales momentum was stronger in all areas and we further improved our performance relative to our competitors, particularly in grocery.

“We have focused on reducing prices on every day food and grocery products and expanding our range of value brands, which have been very popular with customers. At the same time, we are investing significantly in our supermarkets, driving consistent improvements to service and availability.

“Argos continued to grow market share in key categories, but sales were impacted by reduced promotional activity and the timing of new product releases in gaming and toys. Clothing sales were boosted by clearance activity and strong online growth and Tu continued to grow market share. Financial Services sales were in line with expectations.”

Market reaction

Emma-Lou Montgomery, associate director from Fidelity Personal Investing’s share dealing service said: “The first-half profit warning from Sainsbury’s won’t be welcomed by shareholders, but the expected £50 million fall in first-half pre-tax profits isn’t expected to impact full year figures, according to the UK’s third-largest supermarket chain.

“Having already been shoved out of second place by Asda earlier this year, Sainsbury’s knows it has its work cut out to regain momentum. There’s no denying competition is fierce – and getting fiercer – and that fourth successive fall in like-for-like sales can’t go unnoticed. 

“It’s hard to see exactly what Sainsbury’s strategy aims to achieve with 10 new supermarkets set to open and 10-15 close; 80 new Argos in Sainsbury’s to open and 60-70 to close. The only clear shift is in the 110 new convenience stores it intends to open.

“What is clearer still is that Sainsbury needs to pull something out of the bag, fast, in order to stop sales and profits sliding any further.”

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