Sainsbury to Slow Store Openings as Investment Passes Peak

J Sainsbury Plc (SBRY), the U.K.’s third-largest supermarket company, plans to slow the pace of store openings after three years of accelerated expansion as it switches attention to increasing dividends.

The grocer will revert to adding about 5 percent a year to its store space, which has grown by a quarter in the last four years, the London-based grocer said today as it reported a gain in annual profit. Capital spending will be reduced to about 1 billion pounds ($1.62 billion) in the fiscal year through March 2013, from 1.24 billion pounds in the previous 12 months.

Sainsbury follows larger competitor Tesco Plc (TSCO) in reining back store investment as grocers focus on convenience outlets and online services rather than adding more large supermarkets. Chief Executive Officer Justin King said today that spending is past its peak and pledged to raise dividends each year and to build cover to two times so-called underlying earnings.

“This signals the end of the space race,” said Philip Dorgan, an analyst at Panmure Gordon in London. “Focus across the sector will now shift to increasing shareholder returns, which is good news for share prices.”

Sainsbury rose as much as 3.2 percent in London trading and was up 2.3 percent at 308.3 pence at 9:39 a.m., the second-biggest gain in the U.K. benchmark FTSE 100 Index. (UKX)

Fewer Openings

Openings this year will be restricted to about two new convenience stores a week, 20 new supermarkets and as many as 10 store extensions, King said on a conference call.

Larger 100,000 square-foot (9,290-meter) hypermarkets with the majority of space dedicated to non-food items are a “poor format,” the CEO said, adding that Sainsbury’s supermarket openings will be limited to about 30,000 square feet each.

U.K. market leader Tesco said last month it will reduce capital spending by 500 million pounds to 3.3 billion pounds this year as it opens fewer large stores.

Sainsbury faces a fightback by Tesco, which last month unveiled plans to invest 1 billion pounds on store refurbishments, additional staff and improved products to revive sales growth that has trailed the market this year.

Sainsbury’s sales growth was ahead of the market at 5.4 percent in the 12 weeks ended April 15, while its share of the grocery market was steady at 16.6 percent, Kantar Worldpanel has said. That’s the “highest for a decade,” according to King. Tesco’s market share was 30.7 percent, rebounding for a second month after falling to a seven-year low earlier in the year.

Higher Profit

“Whilst the wider economic situation remains uncertain, we remain confident that our clear strategy, market insight and strong values will enable us to make further progress,” King said in the statement.

Sainsbury’s pretax profit, excluding one-time items, rose to 712 million pounds in the year ended March 17, from 665 million pounds a year earlier. The average estimate of 17 analysts compiled by Bloomberg was 702.6 million pounds.

The grocer introduced the Brand Match campaign last year, offering shoppers a coupon at the checkout if their shopping basket could have been bought more cheaply at a competitor. More than 1 million coupons have been issued a day, King said. Promotions and coupons “are here to stay,” he added.

Earlier this month, William Morrison Supermarkets Plc, the smallest of the U.K.’s four main grocery chains, vowed not to be drawn into a coupon battle even as its market share slips.

Sainsbury increased its full-year dividend by 6.6 percent to 16.1 pence a share. The payment is covered 1.75 times by underlying basic earnings of 28.1 pence a share.

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