Sainsbury taps investors for £432m for expansion

Supermarket chain plans to increase selling space by 15% over next two years

Sainsbury's raised £432m from investors yesterday to step up its expansion and take the fight to rivals beyond its heartland in the South of England, as the grocer unveiled its strongest underlying sales for more than a decade in the three months to 13 June.

Sainsbury's tapped investors for £242m through a placing of new shares at 310p and an £190m offering of convertible bonds, due in 2014. Britain's third-biggest supermarket said it would use the proceeds to take advantage of "significant opportunities" in a sluggish commercial property market and to add 15 per cent more selling space over the next two years, up from a previous target of 10 per cent. The expansion will take place primarily in Scotland, Wales and the North and West of England, where it is currently under-represented. Justin King, the chief executive, said: "We have seen greater opportunities than we ever thought possible [in the property market]."

The move signals Sainsbury's growing confidence in its strategy and a more aggressive property drive, following a lack of development over the past 20 years which has left it playing catch-up with rivals, particularly Tesco, which has a grocery market share of nearly 31 per cent. The capital raising will enable Sainsbury's to open 50 new stores and extend 50 others by March 2011, adding about 2.5 million square feet of new space. Non-food ranges will account for about 40 per cent of the new floorspace, as Sainsbury's ramps up its general merchandise offers.

Jonathan Pritchard, an analyst at Oriel Securities, said Sainsbury's was coming from "a position of strength" to tap the equity and debt markets. But Darren Shirley, at Shore Capital, said he was "somewhat puzzled" by the group's decision to use a placing to raise funds, given that its balance sheet was "hardly stretched".

Sainsbury's has also acquired a further nine stores from the Co-operative Group for £29m, having already purchased 24 from its rival for £83m.

Over the 12 weeks to 13 June, Sainsbury's delivered underlying sales growth of 7.8 per cent, excluding fuel and VAT. This was substantially ahead of the 4.3 per cent like-for-like sales growth in the first quarter posted by Tesco on Tuesday, but behind Morrison's 8.2 per cent, albeit for slightly different periods.

Mr King said the "exceptional performance" was ahead of internal long-term targets of 3 to 4 per cent growth. He praised the continued strength of its own-label "basics" ranges, sales of which soared by more than 50 per cent over the period, and its TU clothing range, which had its "best-ever quarter with a record one million transactions in a single week".

Non-food sales grew at twice the rate of food sales. In the second quarter, the Sainsbury's website will begin selling 8,000 non-food products, including kitchenware and furniture. However, clothing will not initially be sold online.

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