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Sainsbury's profits drop due to 'once-in-a-generation' shifts in retail sector

Published:  12 November, 2014

Sainsbury's half-yearly results show the company's underlying profits dropped 6.3% to £375 million, the worst performance in over a decade for the company.

Sainsbury's half-yearly results posted today and show the company's underlying profits dropped 6.3% to £375 million, the worst performance in over a decade for the company.

Mike Coupe, Sainsbury's chief executive said: "We are facing into a once-in-a-generation combination of cyclical and structural change in the industry."

Like-for-like sales dropped 2.1% as well for the first half of the year.

The company blamed some of the poor performance on what the fiercely competitive market conditions as discounters such as Aldi and Lidl expand their market share.

Despite the poor performance the company said it would invest £150 million into making its prices more competitive, with half of the investment coming in the second half of the finical year and the rest coming in the first half of the 2015/2016 financial year. The company did not cut the dividend, as some analysts expected, and will be paying an interim dividend of 5.0 pence per share.

Sainsbury's chairman David Tyler said: "The UK grocery sector has become increasingly challenging in recent months."

In an effort to cut costs the company has reviewed the effectiveness of its stores and scrapped several expansion plans, which resulted in a £628 million "onerous contract charge".

Sainsbury's statements said: "As a result of the review of our supermarket estate, we have impaired a number of our trading stores and have also decided to withdraw from a number of schemes in our property pipeline that are unlikely to achieve an appropriate return on capital, resulting in a total impairment and onerous contract charge of £628 million."

The company also plans on cutting costs by nearly £1 billion over the next three years. "We will deliver total operating cost savings of £500 million over the next three years. This represents annual operating cost savings in the range of £150 million to £175 million, a step up from recent levels. We will reduce capital expenditure to between £500 million and £550 million per annum over the next three years."

Larger retailers like Sainsbury's and Tesco are under pressure to deliver positive financial results for shareholders in an increasing challenging marketplace.

What's more, there is also an increasing amount of pressure from regulatory bodies and suppliers to keep a careful eye on the way retailers deliver on such performance.

Recently Tesco and Majestic have seen suppliers question whether the practices currently employed within the retail sector are sustainable, but also whether they are ethical and legal.