Photographer: Matthew Lloyd/Bloomberg

Sainsbury Deepens Price Cuts as Decade of Profit Growth Ends

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J Sainsbury Plc increased the amount it’s plowing into discounts this year, stoking a U.K. supermarket price war that caused the first profit decline in a decade.

A 150 million-pound ($228 million) price-cutting program announced in November will expand to 200 million pounds, the grocer said Wednesday. The difference will be funded by an increase in selling volumes generated by lower prices for everything from bacon to diapers, leaving the net cost of the program unchanged, Sainsbury said.

The move comes amid an escalating price battle between supermarkets and discounters that is fueling deflation and reducing earnings across the industry. After Sainsbury’s operating profit fell 11 percent last year, the pressure on the business in the new financial year is building.

“We harbor concerns that this appears to be new guidance, and will lead us to further downgrade medium-term forecasts, possibly materially so,” Darren Shirley, an analyst at Shore Capital, said of the latest price development.

Sainsbury shares fell 4.2 percent to 263.5 pence at 2:47 p.m. in London, the steepest drop in the U.K. benchmark FTSE 100 Index. That trimmed this year’s gain to 6.8 percent, trailing Tesco’s 20 percent advance.

The mounting stress on Sainsbury’s sales and earnings was evident in Wednesday’s full-year earnings, which showed a drop in operating profit to 782 million pounds. Including a charge for property writedowns, which the grocer expects to be the last for the forseeable future, Sainsbury posted a net loss of 166 million pounds.

Excessive Space

The supermarket industry is changing at its fastest pace in 30 years, Chief Executive Officer Mike Coupe said, as more consumers shop online and at convenience stores, while making fewer trips to out-of-town superstores.

Sainsbury said that about a quarter of its stores will have some under-utilized space over the next five years, which it intends to fill with clothing and other non-food items, plus in-store concessions such as Timpson shoe repairers.

Coupe said that all of the company’s supermarkets are profitable and he doesn’t expect to close any.

The outlook for this year is for a further drop in same-store sales, the company said, while declining to provide profit guidance. At a press conference, Chief Financial Officer John Rogers said the wide range of analyst forecasts for earnings this year is a reflection of the “significant uncertainty” in the industry and that it’s “difficult to say” whether profits have further to fall.

Wide Range

Estimates for operating profit span 523 million pounds to 772 million pounds, according to data compiled by Bloomberg.

Last year’s profit beat estimates, largely due to the timing of price cuts. Such investment reduced earnings by only 40 million pounds, rather than the 75 million pounds that was expected, Morgan Stanley analyst Edouard Aubin said in a note.

Separately, data from researcher Kantar Worldpanel Wednesday showed that Sainsbury was the strongest performer among the U.K.’s four largest supermarkets in the last 12 weeks, limiting market share losses to 0.1 percent.

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