British supermarket Sainsbury’s warned that higher staff wages and its price battle with rivals would mean a tougher end to the year after first half profit fell by 10%.
Sainsbury’s made an underlying pretax profit of £277mn for the 28 weeks to September 24, down from £308mn in the same period last year hurt by a 1% fall in underlying sales that partly reflected its own price cuts.
“This means further year-on-year margin decline in H2,” said Bernstein analyst Bruno Monteyne who rates Sainsbury’s “outperform”.
Sainsbury’s also said that it was on track to achieve its £500mn cost savings target by 2017-18 and set a new three-year target for savings of the same magnitude from 2018-19.
While Sainsbury’s has proved more resilient than others to the rise of the discounters, it has still reported two consecutive years of annual profit decline.
Sainsbury’s is a distant second behind market leader Tesco in a sector which has been shaken by growing competition from German discounters Aldi and Lidl.
Seeking to expand further beyond food and household staples, it bought Home Retail, owner of the Argos chain for £1.1bn ($1.4bn) in September.
Some investors have expressed concern the Argos takeover unwisely increases Sainsbury’s exposure to higher import costs due to the weaker pound but Chief Executive Mike Coupe dismissed those fears, saying he was “more confident than ever” about the acquisition’s prospects.
However, conditions in the core supermarket business remain difficult and Sainsbury’s is also having to absorb higher costs as it responds to new national minimum wage levels.
Coupe said the market remained intensely competitive, with pricing pressure squeezing margins.
But he said the full impact of the post Brexit vote devaluation of sterling on retail prices was as yet uncertain.