Sainsbury's to Close 60 Argos Branches as Part of Estate Review

In its latest trading update, Sainsbury's has confirmed its intention to close between 60 and 70 Argos stores as part of a store estate review.  

Second Quarter Trading Update:

• Stronger trading across Grocery, General Merchandise and Clothing
  - Further improvement in our performance relative to the market, particularly Grocery

• Second quarter total retail sales up 0.1 per cent (excl. fuel), with like-for-like sales down (0.2) per cent (excl. fuel)
  
  
• Grocery sales increased by 0.6 per cent  
  
  
• General Merchandise sales declined by (2.0) per cent and Clothing sales increased by 3.3 per cent  

At today's Capital Markets Day, Sainsbury's will announce and discuss the following:  

Confident in the core as we create one multi brand, multi channel business

• Investing in our customer offer: value, service, store estate and digital
  - Continued improvements in grocery value, strong customer response
  - Fit for the future store operating model driving greater customer satisfaction  

• Confident in our ability to sustainably fund this investment
   
• Unique opportunity to structurally reduce costs by c.£500m over five years as we bring our businesses together, in addition to ongoing cost savings to cover the impact of cost inflation
  
  
• Financial Services five year plan:  
  - immediately stop new mortgage sales
  - no more Group capital injections after £35m in 2019/202
  - reduce cost: income ratio to c.50% 
  - double UPBT, deliver double digit ROCE and return cash to the Group

• Store estate review and growth plans will result in: c.10 new supermarkets and 10-15 closures; c.80 new Argos in Sainsbury’s and 60-70 Argos closures; c.110 new convenience stores and 30-40 closures
  
  - We expect the closures to deliver an ongoing net operating profit benefit of c.£20m per year. We expect the one-off cost of closures and impairments to be £230m to £270m, of which the cash cost will be £30m to £40m

• New longer-term asset-backed pension plan agreed, providing greater security to the Scheme 
  - Cash contributions reduced immediately by c.£50m p.a. on average
  - 2018 triennial valuation deficit down to £538m, from £1,055m in 2015

• Three year net debt reduction target increased to at least £750m, from £600m
  - Reduction of at least £300m expected in 2019/20 

 We are confident that we can grow sales and sustainably fund investment in our value, service, store estate and digital proposition. This drives our confidence in strong ongoing free cash flow generation, which will continue to support dividend payments (policy unchanged at 2x cover) and net debt reduction, improving financial flexibility and resilience.    

Commenting on second quarter trading, Mike Coupe, Chief Executive Officer, said:

“Sales momentum was stronger in all areas and we further improved our performance relative to our competitors, particularly in Grocery. We have focused on reducing prices on every day food and grocery products and expanding our range of value brands, which have been very popular with customers. At the same time, we are investing significantly in our supermarkets, driving consistent improvements to service and availability.   

“Argos continued to grow market share in key categories1, but sales were impacted by reduced promotional activity and the timing of new product releases in gaming and toys. Clothing sales were boosted by clearance activity and strong online growth and Tu continued to grow market share. Financial Services sales were in line with expectations.” 

Outlook

We expect first half underlying profit before tax to reduce by c.£50m year on year due to the combined impacts of the phasing of cost savings, unseasonal weather against a strong comparative period last year and higher marketing costs. However, in the second half we expect to benefit from the annualisation of last year’s colleague wage increase and a normalisation of marketing costs and weather comparatives. Therefore, while retail markets remain highly competitive and the consumer outlook remains uncertain, we remain on track to deliver full year 2019/20 underlying profit before tax in line with consensus expectations.     

Source : Insight DIY Team and Sainsbury's

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