Sainsbury's to cut spending to lure shrewd shoppers

Sainsbury's half-year underlying profit falls 6.3%
Sainsbury's half-year underlying profit falls 6.3%

Supermarket chain Sainsbury's reported a 6.3 percent drop in half-year underlying pre-tax profit to £375 million ($596.8 million) on Wednesday, and said it planned to grow its non-food business with a focus on clothing, cookware and homewares.

Analysts polled by Reuters had predicted a pre-tax profit of £350 million. Shares of the retailer briefly rose 2.0 percent after markets opened Wednesday before declining almost 6 percent in midday trade.

The group signaled an extremely tough market environment, saying it expected supermarket like-for-like sales in the sector to be negative for the next few years.

The U.K.'s biggest supermarkets -- the so-called "big four" comprising Sainsbury's, Morrisons, Asda and Tesco, which is currently mired in an accounting scandal -- have all reported sales declines as shoppers turn towards shopping locally and discounters like Aldi and Lidl. Sainsburys trails Tesco and Asda in terms of market share, according to Kantar Worldpanel's latest data.

Sainsbury's, which operates 1,200 stores and employs 161,000 people in the U.K., carried out a strategic review of its business in October.

It said Wednesday that the grocery sector "was undergoing structural change as customers shop more frequently, using online, convenience and discount channels more". It is aiming to cut capital expenditure to between £500 million and £550 million per year over the next three years. Profitability would be lower in the second half of the year, it said, as it invested another £150 million in price cuts to compete in a tough U.K. market.

Last month Sainsbury's said like-for-like sales, which strip out the impact of new stores, fell 2.8 percent during the quarter excluding fuel sales. Shoppers were visiting the store more but spending less during each trip.

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Sainsbury's announced an interim dividend of 5 pence per share on Wednesday but expected its full-year dividend to be lower than last year "given our expected profitability." It had been widely expected to cut its dividend and shares of the supermarket have see-sawed this week in anticipation of the announcement.

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Despite the fall in profit, Sainsburys said it would open 500,000 sq ft of space in the next few years, followed by an additional 350,000 sq ft in 2017/2018.

The group cut its full-year sales forecast at the start of October and expects like-for-like sales in the second half of the year now expected to be similar to the first half.

- By CNBC's Holly Ellyatt, follow her on Twitter @HollyEllyatt.