Sainsbury's warns of rising costs as profits fall 8.2%

Sainsbury's has warned about rising costs and falling consumer confidence as it posted an 8.2% fall in annual profits to £503m.

The supermarket's chief executive Mike Coupe said Sainsbury's is trying not to pass on price increases to customers.

But over the last year rising costs have hit profits, with tough market conditions set to continue.

The news left Sainsbury's shares 5.7% down at the end of trading, with the stock the biggest FTSE 100 faller.

Mr Coupe said: "We've managed to work with our suppliers and reduce our own costs."

But Sainsbury's predicts that its costs will go on rising by 2% to 3% over the next 12 months, largely because of the fall in the value of the pound which makes imported goods more expensive.

As a result, it forecasts that underlying profits in the next six months will be lower than in the last six months.

Mr Coupe told the BBC: "We've done a brilliant job of reducing the impact of the currency movements on our customers.

"We've seen a minor tick-up in inflation, but we'll continue to look to not pass on the price increases that we see coming through."

Meanwhile, the slow growth in wages is also having an effect on customers' shopping habits.

Group sales in stores open for more than a year fell 1%.

Sainsbury's said that general merchandise and clothing sales growth had been hit by reduced consumer confidence and a marked slowdown in real pay growth.

New divisions

Sainsbury's bought the Home Retail Group, which includes the Argos and Habitat brands, for £1.4bn last year. Wednesday's profits statement is the first to show the acquisition's impact on the whole group.

Once their sales are added in, overall group sales increased 12.7%.

Merging the operations has produced cost savings of £130m and a profit contribution from Argos of £77m.

Mr Coupe said: "We have opened 59 Argos Digital stores in Sainsbury's supermarkets and they are performing well. We are therefore accelerating our plan to open a total of 250 Argos Digital stores in Sainsbury's supermarkets."

"We continue to find ways to simplify our business and reduce costs. We are on track to deliver our three-year £500m cost saving programme by the end of 2017-18 and we will deliver a further £500m of cost savings over three years from 2018-19."

Sainsbury's is also seeing a change in shopping habits, with customers making more trips to smaller stores, but spending less on each trip. Sales in Sainsbury's convenience stores grew more than 6%, while those in its big supermarkets fell 2%.

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The supermarket is also facing pressure from discounters like Aldi and Lidl.

Research group Kantar released a report showing Sainsbury's market share slipped from 16.5% to 16.1% of the UK market in the 12 weeks to 23 April. It has the second largest market share, behind Tesco with 27.5%.

Asked whether Sainsbury's would ever catch up Tesco, Mr Coupe told the BBC: "I think that'll be a long time coming , but the acquisition of the Home Retail Group has added quite a lot to our top line, and our market share has been remarkably resilient."

Neil Wilson, senior market analyst at ETX Capital, said: "Sainsbury's faces a squeeze on several fronts.

"On one side, there are discounters like Aldi and Lidl crushing prices and stealing market share, while Tesco and Morrisons are both in the middle of strong turnaround programmes that are leaving Sainsbury's trailing."

Sainsbury's shares were the biggest faller on the London FTSE 100 index, dropping more than 2% in the first 20 minutes of trade.

The full-year dividend paid to shareholders has been reduced by 15.7% to 10.2p a share.