Sainsbury's profits warning shocks City

NIGEL COPE

Sainsbury's shocked the City yesterday when it issued its first profits warning since it floated on the stock market in 1973. The company said profits in the current year would be "below earlier expectations" due to increased spending on customer service measures, keener pricing in its supermarkets and a poor performance from Texas Homecare, which is struggling in the cut-throat DIY market.

The announcement forced analysts to downgrade their full-year profit forecasts from as high as pounds 810m to between pounds 750m and pounds 760m. This is significantly lower than last year's pounds 809m and breaks the company's unbroken run as a public company, during which it has reported higher trading profits each year.

The profits warning wrong-footed City analysts, who had felt the group was turning the corner after a difficult 1995 during which it lost ground to Tesco and Asda. Tony MacNeary of NatWest Securities said: "This shows there is still a lot more to do in the business. New management has still to get to grips with the business and there could be more costs to come."

Sainsbury's shares fell 21.5p to 389p on the news. The slump wiped out gains earlier this month when the City had responded warmly to a boardroom shake-up which saw David Sainsbury split the roles of chairman and chief executive.

The warning overshadowed a relatively upbeat statement on sales increases, which showed that the January Savers price promotion had provided a significant boost to sales.

Mr Sainsbury said the group was keen to regain its market shares leadership over Tesco but admitted it might take time. "That will remain our objective but I don't think [it will happen] this year," he said.

Supermarket sales in the 16 weeks to 13 January were up by 3 per cent on last year, excluding new store sales. Trading over the Christmas period was healthy at 4.5 per cent up on the previous year. In the peak pre-Christmas week, sales broke the company's previous record by a significant margin.

The figures are lower than the 8 per cent increase reported by Tesco last month, though this was achieved on a lower margin due to the launch of its loyalty card.

SavaCentre performed strongly while the Homebase DIY chain increased sales by 4.5 per cent.

David Sainsbury denied that the announcement had contained any shocks and said he was pleased with the supermarkets' performance: "Things are now heading in the right direction. We are investing heavily to improve the service and value for money provided by our supermarkets and this has resulted in an improving sales trend."

Sainsbury's has added 2,500 more supermarket staff at a cost of around pounds 10m. These will be employed on checkouts, service counters and as packers.

David Sainsbury said the management restructure was now complete and dismissed suggestions that the group needed an operations director. "We appointed a new retail director, David Clapham, only four or five months ago. We have a good, strong team."

However, the Texas Homecare chain, which Sainsbury's bought from Ladbroke a year ago, has continued to struggle. Sales in the 16 weeks to mid January fell by 7.5 per cent, due to store closures. Kitchen sales were slow.

Sainsbury's had been saying that the chain would break even over the full year but some analysts are now forecasting a loss of up to pounds 10m. It is expected that the stores' performance will improve when they are re-branded under the Homebase name.