The UK's second largest supermarket chain, Sainsbury, has today (22 November) revealed a 16.9% decline in H1 profits to £300m, excluding goodwill, amortization and exceptional items. Highlights of the results can be found, however, in the supermarket division' sales, which are up 2.4% from 1999, and the fact that group sales rose 7.7% to reach £9.75bn.

The results slightly exceeded analysts' expectations of £295m, which were formed in light of the fact that the group has been buffeted by market and share erosion over the last year, and Sainsbury's newly inaugurated CEO Peter Davis claimed to be pleased that the "results are very much in line with our expectations."

On track to a turnaround in profitability

Davis also stated that he was confident that he could stabilise group profits for the year, and continue on his course to generate £600m with the implementation of a three-year cost cutting and investment plan. The UK supermarkets are "on track to a turnaround in profitability," he said.

Davis spoke in October of the group's focus on more expensive quality products, rather than engaging in a price war with Tesco, which they could not hope to win, but as yet despite high expectations that his management will reinvigorate the group's flagging fortunes, the group's financial results have yet to show the impact of Davis' initiatives.

He maintains however that the groundwork will start to show positive results: "Customers are responding very positively to our renewed focus on quality and range. We've launched 350 products in our new Taste the Difference range with which we won eight Supermarketing product awards last week. We were also voted Organic Supermarket of the Year by You magazine."

During the first half, supermarket operating profit fell 23.1% to £255.5m, which was in line with company forecasts, attributed primarily to higher costs from a combination of differential inflation and investment in customer services. One example of this is at Sainsbury's Bank, where operating profit of £8.5m was recorded, a £7.6m improvement on 1999 that reflects focus on the more profitable loans business and the launch of new consumer services such as the Visa card and the car scheme, Drive.

Takeover talks at Homebase are at an advanced stage

Excitement has been prompted since October by the expectation of a divestment of Sainsbury's Homebase, which could fetch £1bn on the market. Sales at the DIY division, the second largest UK chain, rose 8.3% on a like-for-like basis and Q2 growth remained strong despite the impact of the UK petrol crisis. Operating profit was up 7.3% to £39.8m, but this period also includes the benefit of Easter trading and the higher pre-opening and development costs incurred in the new larger format of stores

News of the delayed sale can now be expected imminently. Davis revealed: "We would be disappointed if there wasn't an announcement before Christmas," but would say nothing other than that talks were at an advanced stage.

Mixed fortunes abroad in US

On a more international basis, the Sainsbury group had mixed fortunes. In the US, the group witnessed strong profit growth of 30.9% to US$83m in its Shaw's subsidiary , but like-for-like sales failed to meet expectations, growing by 0.5% to US$2.17bn. During Q2, market share remained stable and the group achieved the full integration of Star Markets.

Davies also unveiled plans to strengthen Sainsbury's position in New England, with the acquisition of eighteen Grand Union Stores set for January completion, each store expecting to gross US$150m in annual sales. "Shaw's has become a significant company with revenues of circa US$4bn. It is the twelfth largest US food retailer and gives us a strong regional position in this stable market with good prospects," he commented.

"We are concerned about our investment in Egypt"

In Egypt meanwhile, the group's 85 stores suffered a higher than expected operating loss of £10.2m on sales of £40.5m, which is blamed on the deteriorating trading environment in the Middle East and "local licensing difficulties" which delayed store openings. Today's statement revealed that the group is now, as a result of this H1, "concerned about our investment in Egypt, which is currently over £100m. Although this market may have attractive longer term growth opportunities, we are cutting back our development programme further and reviewing all strategic options for reducing our financial exposure to this region."

Projections for activities during H2

During H1, Sainsbury opened seven new supermarkets and five local stores in the UK, refurbishing and extending thirteen more. Davies revealed that this rapid expansion would also characterise the oncoming time during H2. The group appears on track to complete its anticipated 35 store refurbishments by the end of 2000, and during 2001 Davies talks of upgrading up to 150 more. In H2, the group will also encounter increased spending on more exceptional items, including its business transformation plan.

The group is also becoming involved in the creation of the Taste Network company. Through a joint venture with Carlton Communications, Britain will receive a new television and Internet food and drink channel, to be launched in spring next year. Sainsbury group director of e-commerce, Patrick McHugh, commented: "This alliance is another step in the rollout of Sainsbury's e-commerce strategy, bring[ing] to life the promise of digital interactive television and enabl[ing] viewers to place orders for their home grocery deliveries directly from their living rooms."

With regard to the recent report by the competition commission, Davis admits he is now hesitant to heavily embark on new intra-UK deals. "There was a bit of a warning shot from them about too much consolidation, I suspect there are not many options for large scale combinations...it is more likely to be parcels of stores by area rather than a single transaction," he said.

In the meantime, the company's directors proposed an unchanged interim share dividend of 4.02p, to be paid to shareholders on 12 January if they were registered at the close of business on 8 December.