Argyll warns of lower pre-tax profits: Property depreciation move will depress figures - Margins suffer as retailer cuts prices to compete

ARGYLL, the owner of the Safeway supermarket chain, warned yesterday that falling sales and narrower margins will lead to a decline in taxable profits.

It said that like-for-like sales in its stores had fallen 0.4 per cent in the 16 weeks to 5 February, a period of aggressive price-cutting by multiple food retailers.

This compares favourably with the 1 per cent fall in turnover recently reported by the market leader J Sainsbury. Tesco, however, managed to increase volumes by 4.5 per cent, largely with the successful introduction of its Value range of grocery items.

The company said yesterday: 'In view of the current gross margin pressures . . . profit before tax for the year to 2 April 1994 is expected to be slightly below last year.'

City analysts reduced pre-tax profit forecasts below pounds 400m in the wake of yesterday's statement.

Tony MacNeary, of NatWest Securities, thinks Argyll will make comparable profits of pounds 394m this year against pounds 408m in 1993. However, Argyll's figures will be further depressed by pounds 40m following the company's decision to depreciate its freehold properties.

Sir Alistair Grant, chairman, said: 'The industry leader (Sainsbury) has been piling on the pressure with competitive prices and marketing expenditure. Against that backdrop I am reasonably satisfied with the 0.4 per cent fall in volumes.'

He said that gross margins suffered because the group reduced prices to meet competition from Sainsbury and Tesco. Sainsbury's 'Essential for the Essentials' price-cutting campaign had taken Argyll by surprise.

Sir Alistair said the company had to respond to the price war before it could win cost reductions from its suppliers and margins had suffered. But he added: 'In recent weeks some recovery has been achieved.'

Sir Alistair also said that Argyll was looking for ways to cut its operating cost base, raising the possibility of job losses.

Argyll also promised to raise its final dividend to 7.75p, which will make a total for the year of 11.5p, 5 per cent more than in 1993.

Shares fell from 261p to 256p partly because of the fall in sales but also because Argyll dampened expectations about future dividend increases.

Sir Alistair said: 'Ignoring the step down caused by the depreciation charge, dividend growth will reflect earnings per share growth.'

The group had been trading in a zero-inflation environment, but he warned that there were signs prices were beginning to rise again.

'Inflation is going to re-emerge later in the year,' he said.

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