Ever since the collapse of J Sainsbury’s (SBRY) much-vaunted merger with Asda, it has been struggling to get investors to buy into its growth strategy. However, the supermarket’s latest update unveiled a wide-ranging overhaul of its store footprint, prompting a 2 per cent bump in the share price. So does the turnaround begin here?
Management has completed a review of its store estate and now plans major action to change its footprint – notably by moving Argos stores into its supermarkets and expanding its convenience store presence. It will shut 10-15 existing supermarkets in favour of 10 new ones, while 30-40 convenience stores are to be replaced by 110 new stores. In addition, 30-40 Argos outlets will also go, although 80 “Argos in Sainsbury’s” desks are to be opened.
Overall, trading improved slightly in the 12 weeks to 21 September, although like-for-like sales were down 0.4 per cent. Hardly inspiring stuff, but the group saw total retail sales in both its grocery and clothing businesses reverse the decline suffered so far this year, generating sales growth of 0.6 and 3.3 per cent, respectively.
However, management said the group’s performance had improved relative to the market and, in the context of the wider sector, these achievements are not to be taken lightly. Data from the British Retail Consortium earlier this month showed retail footfall in August fell 1.3 per cent overall on the prior year, and was down over the past three, six and 12 months.
Data from Kantar Worldpanel, meanwhile, showed Sainsbury’s had lost 60 basis points of UK grocery market share since the beginning of the year, compared with 80 and 70, respectively, for Tesco and Morrisons. Asda lost just 20 basis points.
Still, the group has recognised the need for drastic action to get its house in order. It has raised its net debt reduction target by £150m to £750m over the next three years, with “at least £300m” expected in the current financial year. It has stopped the financial services division selling new mortgages – following in the footsteps of rival Tesco (TSCO), which sold its mortgage book to Lloyds Banking (LLOY) after it stopped issuing last May. Sainsbury's also said it would stop giving the division capital injections after £35m in the current year.
Management warned that the group’s first-half profits would fall by £50m year on year following a strong comparative period last year, combined with unseasonal weather and cost-saving initiatives. However, Sainsbury is on track to meet full-year profit expectations of £632m.
