Britain’s Sainsbury’s warns of lower profit as inflation hits

British supermarket group Sainsbury’s (SBRY.L) followed market leader Tesco (TSCO.L) in warning that soaring inflation would lower profit in the current financial year, taking the shine off a more than doubling of annual profit.

Sainsbury’s said on Thursday its underlying profit before tax in 2022-23 was expected to be between 630 million pounds and 690 million pounds ($789-$864 million).

The group made an underlying profit before tax of 730 million pounds in the year to March 5, 2022, benefiting from lower COVID-19 costs, while analysts on average had expected 703 million pounds for 2022-23.

“The year ahead will be impacted by significant external pressures and uncertainties, including higher operating cost inflation and cost of living pressures impacting customers’ disposable incomes,” Chief Executive Simon Roberts said.

Shares fell 3.7 per cent in early trade, underperforming the wider market, and adding to a fall of 13 per cent so far this year.

Already this month, Tesco, No. 4 player Morrisons and No. 7 the Co-operative Group have all warned on the outlook as a cost of living crisis and supply disruption due to the war in Ukraine weigh on the grocery sector.

Surging prices are causing the biggest squeeze on UK household incomes since at least the 1950s and consumer confidence is at near record lows.

Analysts see Sainsbury’s as more challenged than other supermarket groups because of its ownership of the Argos general merchandise business – a sub-sector more exposed to pressure on consumers’ disposable income.

Sainsbury’s revenue rose 2.9 per cent to 29.9 billion pounds in 2021-22. Like-for-like sales, excluding fuel, fell 2.3 per cent. They fell 5.6 per cent in the fourth quarter, having fallen 4.5 per cent in the third quarter.

General merchandise sales slumped 21.1 per cent in the fourth quarter, having fallen 16 per cent in the third.

Britain’s inflation rate hit a 30-year high of 7 per cent in March and is expected to peak at nearly 9 per cent later this year. Food inflation hit 5.9 per cent in April, according to industry data.

Sainsbury’s said it continued “to inflate behind competitors on the products customers buy most often,” and last week lowered prices across 150 of its highest volume fresh products.

On Monday, both No. 3 player Asda and Morrisons said they were cutting prices on essential items.

Sainsbury’s is paying a full year dividend of 13.1 pence, up 24 per cent and has committed to increase its dividend payout ratio to around 60 per cent.