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Sainsbury Sees ‘Challenging’ Year as First-Half Profit Gains

J Sainsbury Plc, the U.K.’s third-largest supermarket company, predicted that the grocery market will remain “challenging” after saying its Brand Match campaign helped drive a 5.4 percent gain in first-half earnings.

Inflation on food will increase in the next few months, with shoppers buying less, topping-up more frequently and switching to own-label items to save money, Chief Executive Officer Justin King said on a conference call today.

“As we stand today, inflation and wage awards are playing a bit of a draw, the direction of traveling inflation is up and we think for the next few months that is probably the case on food,” King said on the call. “So we’re going to see a further reduction in household budgets.”

Poor harvests overseas and wet weather in the U.K. have led to pressure on food prices, while rising household energy tariffs mean Britons have less to spend on their weekly grocery shop. U.K. consumer prices climbed 2.7 percent last month from a year earlier, the most since May, the Office for National Statistics in London said yesterday.

“Christmas is expected to remain highly competitive,” said Kate Calvert, an analyst at Seymour Pierce in London with a hold rating on Sainsbury. “Yesterday’s rising inflation number is a reminder that consumer spending will remain under pressure with increased fuel prices this winter yet to come.”

Shares Drop

Sainsbury fell as much as 1.9 percent in London trading and was down 1.6 percent to 341.8 pence at 8:56 a.m. The stock has gained 14 percent this year, while larger competitor Tesco Plc has fallen 20 percent.

Underlying pretax profit rose to 373 million pounds ($592 million) in the six months ended Sept. 29, the London-based retailer said today. That compared with the 371.3 million-pound median estimate of six analysts compiled by Bloomberg.

Sainsbury said it has printed 250 million Brand Match vouchers since the start of the price campaign in October last year. Customers received a notice telling them Sainsbury’s was cheaper than competitors more than half the time.

Brand Match ensures shoppers don’t pay more for branded goods than at competitors by checking more than 14,000 goods at the point of sale. Customers get a coupon if rivals are cheaper, according to the company. The campaign helped boost Sainsbury’s share of U.K. grocery spending to 16.8 percent in the 12 weeks ended Oct. 28, according to researcher Kantar Worldpanel.

Dividend Increase

The retailer is re-launching its ‘by Sainsbury’s’ range and adding as many as two convenience stores a week to boost growth.

“Sainsbury’s continues to successfully steer between delivering good quality food and promoting compelling value for money messages,” said Neil Saunders, managing director of Conlumino market research in London.

The retailer increased the interim dividend by 6.7 percent to 4.8 pence, slightly ahead of forecasts.

Sainsbury, which sponsored this summer’s London Paralympic Games, last month reported a 1.9 percent gain in second-quarter sales at stores open at least a year, excluding gasoline. That extended an unbroken growth record stretching back to 2005.

First-half revenue excluding value-added tax rose 4 percent to 12.2 billion pounds, meeting analysts’ estimates.

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