Sainsbury's shares plunged 13 per cent to 341p, their lowest point for five years, after the company said this year's profits would be around pounds 60m lower than City expectations due to problems across its range of businesses.
The shock warning means Sainsbury's profits will fall for the second consecutive year. Profits for the year to March will be the fallen giant's lowest since 1992. Sainsbury's said this year's profits would be around pounds 640m-pounds 650m, compared to analysts' estimates of pounds 715m.
The supermarket group blamed the fall on high costs associated with building sales through its loyalty card as well as higher conversion costs at Texas Homecare, the DIY chain acquired two years ago. Sainsbury's US businesses have also been hit by problems.
In addition Sainsbury's will incur an additional pounds 50m charge as it accelerates the conversion of the Texas format to Sainsbury's Homebase.
The severity of the announcement shocked analysts and institutional shareholders who were voicing fears yesterday that Sainsbury's had "lost the plot" in the battle against Tesco as the gap between the two rivals widens.
One large institutional shareholder, who declined to be named, said the warning was particularly surprising as it came only a month after Sainsbury's management had visited institutions with an upbeat message. "They were very positive just before Christmas so this is a major shock. It seems that there are a lot of small things going wrong everywhere. It looks pretty dire."
Tony MacNeary of NatWest Securities said he expected Tesco to take advantage of Sainsbury's obvious vulnerability to increase the pressure.
Frank Davidson of James Capel said: "It makes you feel that management has lost control. Sales growth looks pedestrian, the cost of the Reward card is higher than expected. Management credibility stands at an all- time low."
The profits warning accompanied the announcement of sales growth of 4.4 per cent in the eight weeks over the Christmas .The figures were in stark contrast to the 7.5 per cent increase announced by Tesco earlier this week.
Sainsbury said that the Reward card was contributing a 2 per cent sales uplift, the bottom end of pre-launch expectations and barely enough to cover the card's costs.
With food price inflation running at 3 per cent, Sainsbury's real sales growth is only 1.4 per cent. David Sainsbury, chief executive, said that real sales growth of 1 per cent was historically "pretty good" for Sainsbury's. He admitted that shareholders would be disappointed with the profits warning but hoped they would be pleased with the sales growth.
"The strategy of the supermarkets is working. We have turned around the sales performance."
However, with the shares sliding and analysts suggesting a switch to Tesco and other supermarket stocks, the new Sainsbury top team faces a stern test.
The group has been consistently out-manoeuvred by Tesco and a rejuvenated Asda. It was forced into a U-turn with the launch of its own loyalty card and was second into financial services with its yet-to-be launched Sainsbury's Bank.
Now it appears the cost of trying to claw back market share lost to Tesco has been far higher than anticipated. The integration of Texas Homecare is also proving costly. Sainsbury's now admits that Texas was in far poorer condition than was apparent at the time of the deal with Ladbroke.
The two parties are still pounds 70m apart on their valuations and the matter remains in the hands of an arbitrator. Sainsbury's hopes to settle the dispute next month. Mr Sainsbury declined to admit he had paid too much.
Sainsbury's US businesses are also performing poorly. At Shaw's, the US supermarket business, like-for-like sales grew by just 1.4 per cent in the 16 weeks to 11 January. At Giant, of which Sainsbury's owns a 20 per cent stake, the group said profits would be pounds 5m lower.
With Sainsbury's profits expected to be around pounds 650m this year, analysts trimmed next year's forecasts. NatWest Securities downgraded from pounds 794m to pounds 704m. BZW cut its from pounds 735m to pounds 675m.
How they lost the plot
Feb 1995: Tesco launches ClubCard loyalty card. David Sainsbury dismisses them as `electronic green shield stamps'
Sept 1995: Tesco edges ahead of Sainsbury in market share for the first time
Jan 1996: Sainsbury warns that year profits will be below expectations
May: Sainsbury announces first fall in profits for 22 years as pre- tax profits slide to pounds 712m from pounds 809m
June: Tesco adds ClubCard Plus interest-paying card
June: Sainsbury does U-turn and launches its own loyalty scheme, the Reward card
Oct: Sainsbury's tries to capture the lead in financial services with plans for a Sainsbury Bank with Bank of Scotland
Oct: Sainsbury's half year pre-tax profits slip to pounds 393m against pounds 456. Full year forecasts cut to pounds 710-725m
Jan 1997: Latest market share figures show Sainsbury at 20.1 per cent, still behind Tesco with 23.2 per cent
Jan 1997: Sainsbury shocks City with another profit warning. Announces sales growth far lower than Tesco
The City verdict
`It looks pretty dire. It seems that there are a lot of small things going wrong everywhere. This is a major shock'
Fund manager of a large institutional shareholder
`Sainsbury is now looking very vulnerable and I think Tesco will take advantage of that'
Tony MacNeary, NatWest Securities
`It makes you feel that management has lost control. Sales growth is pedestrian. The costs of the Reward card are higher than expected. It's really in disarray'
Frank Davidson, food retail analyst, James Capel
`This is not the bottom. I see nothing here to say that this business has turned the corner'
`The strategy in the supermarket business is working. We have turned around the sales performance'
Chairman of Sainsbury'sReuse content