Sainsbury's supply problems lead to first loss in 135 years

Justin King, J Sainsbury's chief executive, yesterday insisted he was "very confident" the supermarket group could cope with Christmas as it sunk to its first loss in 135 years.

Justin King, J Sainsbury's chief executive, yesterday insisted he was "very confident" the supermarket group could cope with Christmas as it sunk to its first loss in 135 years.

Most of the £426m exceptional hit that pushed the grocer into the red reflected the company's defective supply chain. Despite admitting that availability was still "not where it needs to be", Mr King said: "I am very confident we can cope with Christmas."

The company, which has issued four profit warnings this year, posted a pre-tax loss for the six months to 9 October of £39m. This compared with a £323m pre-tax profit the previous year. Excluding exceptional items, which included a £275m profit on the sale of its US supermarket business, pre-tax profits were £131m.

Sainsbury's, which floated in 1973, revealed that its gross profit margin had collapsed to just 1.9 per cent, down from 3.9 per cent the previous year. Tesco's margin is 6 per cent.

The margin meltdown came after Sainsbury's cut prices on 6,000 items and racked up millions of pounds of "wastage" - extra stock it was forced to order to compensate for its supply chain failings. Yesterday Mr King said "strong" margin recovery would not happen until the end of 2006 at the earliest.

The group is employing 3,000 extra full-time staff to stock shelves manually after attempts to automate its supply chain failed. "I am very confident that we've not got a particular problem that we haven't addressed," Mr King said, adding he saw "early green shoots" of recovery regarding availability.

But he warned: "Availability is about satisfying customers. It is not something that necessarily flows through to sales." Interim underlying sales, excluding petrol, fell 0.9 per cent and are not expected to pick up until the second half of next year.

The company yesterday wrote off £256m of the supply chain and IT investments that its former boss, Sir Peter Davis, initiated. It will have to spend an extra £200m to upgrade its IT system and supply chain.

Sainsbury's shares, which have rallied on takeover speculation, rose 2.25p to 271.5p. Mr King confirmed the group was working with Morgan Stanley, the investment bank that helped Marks & Spencer remain independent earlier this year. "They are advising us on what our position will be were there to be a bid," he said.

Industry figures yesterday showed Sainsbury's had clawed back a modicum of market share. Its share of the grocery market was 15.5 per cent in the 12 weeks to 7 November, up from 15.3 per cent two months ago. The research, by TNS Superpanel, showed Safeway's market share was 5.8 per cent during the period, down from 8.8 per cent a year ago.