Sainsbury's shocks with profit warning

J Sainsbury yesterday unveiled sharply worse trading figures as it issued a profit warning and announced the surprise £1.37bn sale of its US arm Shaw's.

Shares in the company, which is sliding ever further behind its rivals, plunged 7 per cent to 261.5p as analysts slashed their profits downgrades for the second time this year and speculated that the decision to hold this year's dividend would be followed by a cut next year.

Reporting a 0.9 per cent fall in underlying sales for the fourth quarter, the company announced it would withdraw from the US market in a strategic U-turn that freed up cash proceeds of £1.2bn. It will return around half of these - or 35p per share - to shareholders and spend the rest on improving its 550 UK stores. It is in talks to buy 20 stores from three other retailers, it revealed.

Sir Peter Davis, who hands over the chief executive role to Justin King on Monday, said selling the New England-based Shaw's would save Sainsbury's from fighting growing competition from Wal-Mart on two fronts.

In the UK, a resurgent Wal-Mart-owned Asda recently overtook Sainsbury's as the country's second biggest supermarket chain, while in the US, the retailing giant is preparing an assault on Shaw's home turf. "The growth of the discounters in New England meant that profitability [at Shaw's] was going to be vulnerable," he said.

Sir Peter, who had previously argued that Shaw's was a robust format that could withstand pressure from the Wal-Mart juggernaut, denied that the distraction of running the US business had contributed to yesterday's dire UK figures. "The distraction has been what we've been doing in the UK business," he said, referring to the £3bn that the company has invested in overhauling its antiquated IT system, down-at-heel store portfolio and opening seven new state-of-the-art depots.

Shaw's, which Sainsbury's has built up into New England's number two chain during two decades of trading in the US, is being bought by Albertsons. Based in Boise, Idaho, Albertsons is the second largest grocer in the US, with 2,300 stores in 31 states and annual revenues of $35bn. Although surprised by news of the disposal, analysts said the price looked fair.

The sale failed to distract attention from what one analyst castigated as an "appalling" end to the year.

The group said like-for-like sales in its fourth quarter fell by 0.9 per cent including petrol sales, a figure that compared with near double-digit growth from Wm Morrison. Of its major rivals, only Safeway fared worse. For the year to 27 March, underlying sales were 0.2 per cent lower.

Sir Peter blamed the fourth quarter shortfall, which came despite a heavy investment in prices, on "intense price competition". Tesco, Asda and Wm Morrison have announced multimillion-pound price cuts since the start of the year, leaving Sainsbury's little choice but to follow suit. Its own unspecified investment in lower prices was behind a 50 basis point fall in the group's operating margin - the first time it has lost margin as well as sales.

The margin deterioration came despite news that it was on target to save an extra £250m of costs this year, bringing the cumulative cost saving total since Sir Peter's restructuring programme started to £710m.

Sir Peter said the massive overhaul of the company meant all the ingredients were there for Mr King to start cooking with. As for when the current "tough" period looked like ending, Sir Peter said it was up to "the new chief executive" to decide. He said the group was "getting on with" appointing a chairman elect, to replace Sir Ian Prosser who was ousted before he even started by a shareholder rebellion.

Analysts yesterday cut forecasts for this year's underlying pre-tax profits to around £675m from £710m - down from £810m just 18 months ago - and for next year's to £645m from £750m, excluding the effect of selling Shaw's.

Separately, Sainsbury's said Sara Weller, its deputy managing director, was leaving to run GUS's general retailer Argos. Ms Weller, who was in the running to replace Sir Peter as chief executive, is understood not to get on with Mr King.