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Sainsbury’s Share Price Gains On Restructuring Plans

by Paul

Following its failed bid to merge with rival UK supermarket chain Asda after the deal was scuppered by demands by the competition watchdog, Sainsbury’s today announced a restructuring strategy that has seen its share price add just shy of 2% today. Markets have reacted positively to the announcement that the company plans to cut costs through a shake-up at its head office, the closure of 125 stores and retreat from the mortgage market.

Argos, the general merchandise retailer owned by Sainsbury’s will face the brunt of the store closures with 70 stand-alone high street stores moved into Sainsbury’s supermarkets. Over the next 5 years a total of 80 Argos locations will be incorporated into Sainsbury’s premises. 10-15 supermarkets will also be closed along with 30-40 convenience stores. However, those facing the cull are the company’s poorest performing locations. It will also move to open new locations for as many as 110 new convenience stores and 10 supermarkets.

However, rumours that chief executive Mike Coupe, who has held the position since 2015, was set to step down appear to have been premature. He yesterday reaffirmed his intention to continue in the job by saying that he was “committed to the business . . . there is plenty to be doing”. Having tied his future to merging with Asda to create the UK’s biggest supermarket chain, there were serious doubts around whether its failure would mean someone else would take Sainsbury’s forward as a stand-alone entity. However, the support of chairman Martin Scicluna appears to have convinced both Coupe and the supermarket’s board that he is still the man to lead a new strategy.

While the planned store closures are forecast to save Sainsbury’s a total of £500 million the process will, the company warned, see underlying profits over the first half of the current fiscal year fall by £50 million.

The move to discontinue as a provider of mortgages isn’t a major surprise. The company’s move into banking hasn’t been a success with the unit losing £34 million last year. Sainsbury’s follows a similar move by Tesco who sold its own mortgage business of 34,000 loans to Lloyds earlier this month. Competition levels in the sector and rock bottom interest rates mean even specialist lenders are finding it difficult to make money in the current environment. It has not yet been decided if the company will decide to sell on its existing mortgage book or not.

The decline in the company’s core groceries business appears to have been arrested for now. Grocery sales over the most recent quarter rose by 0.6% and overall like-for-like sales were down a modest 0.2% compared to 1.6% over the previous quarter. Full year profits are forecast to be in line with forward guidance.

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