Broker fuels fears of fresh profit warning at J Sainsbury

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The Independent Online

Fears that J Sainsbury is about to issue a profit warning mounted yesterday after its joint house broker slashed almost one-fifth off its profit forecasts.

The supermarket chain, which has seen sales go backwards amid fierce competition and a botched attempt to overhaul its distribution network, has already disappointed the City twice this year. It ousted its chairman, Sir Peter Davis, in July after the extent of his failure to turn around the group became clear.

UBS, one of its two brokers, cut its underlying profit forecast to £330m from £400m for the year to March 2005 and predicted the group would halve its dividend payout. It estimated interim operating profits would more than halve to just £147m from £313m.

Shares in Sainsbury's, which have tumbled since their recent bid speculation-inspired peak, initially dived 6p, before regaining to close 0.75p lower at 254p - a fresh 15-month low.

Justin King, the new chief executive, is due to reveal his blueprint for the struggling chain's future later this month. Since taking the helm this year, Mr King has invested heavily in lowering prices. But recent industry figures suggest the cost-cutting campaign failed to ignite sales, with Sainsbury's market share dipping to 15.3 per cent from 15.4 per cent in the past 12 weeks, according to Taylor Nelson Sofres.

Simon Dunn, at UBS, blamed the ineffectual price cuts for his decision to reduce his forecasts, warning of worse to follow. He wrote in a research report: "In the short term, the investment in customer service to improve availability and the cost of lowering price points suggest profitability is lower than we anticipated in July. We have downgraded our 2004-04 profit forecasts, but profitability may not yet have reached base level."

Separately, analysts at Citigroup predicted a "major profit warning" ahead of Mr King's announcement on 19 October. "With anticipated downgrades, a potential profit warning and an expected dividend cut, we would sell the shares ahead of any announcement," they said, casting doubt on the prospect that a takeover bid could emerge. "Such a profit warning, plus the anticipated dividend cut, could mean that shares may fall very sharply, and that any would-be suitor is scared off by the poor state of the business," they added.

Last week, Panmure Gordon issued an ultra-bearish note in which it slashed its forecasts for Sainsbury's to 50 per cent below the City consensus, predicting it would need to eventually cut its dividend by up to two-thirds. It described a recent visit to some of the group's stores as "depressing".

A spokeswoman for Sainsbury's declined to comment on the note, but said analysts at UBS had not been briefed. ABN Amro, the group's co-broker, is still predicting pre-tax profits of £400m - down from £770m earlier this year, although this figure included a contribution from Shaws, the US supermarket group that has now been sold.

Mr Dunn dismissed the chance of a takeover bid for Sainsbury's, saying: "The difficulty in both reducing leverage and achieving an exit suggests that private equity investors are likely to look elsewhere.... Frankly we are dubious."

In slashing his forecasts, Mr Dunn all but ruled out the prospect that like-for-like sales would improve until late next year. He also predicted margins would languish, adding: "In simple terms we do not expect a margin recovery."

UBS estimates that Sainsbury's has cut prices more sharply than any food retailer bar Morrison during the past three months, leaving its prices 3 per cent more expensive than Asda, down from 5 per cent in February. As well as price cuts, UBS said continued problems with availability, investment in better customer service and mark-downs in its unsuccessful non-food lines had contributed to its decision to cut its forecasts. "Given the intentions of Morrison, Asda and Tesco on price, we may not yet have captured all of the profit impact of becoming 'more competitive' in forecasts," the broker added.

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