LONDON (Reuters) - Sainsbury’s, Britain’s second biggest supermarket group, said sales growth slowed over the past three months because it pushed through price cuts, denying it had been distracted by its deal to take over rival Asda.
Although Sainsbury’s food trading performance is lagging rivals, its shares are by up over a third this year on the back of April’s agreed 7.3 billion pounds ($9.7 billion) takeover of Walmart owned Asda.
The combination, which would overtake Tesco as Britain’s biggest supermarket chain, is being looked at by Britain’s regulator, the Competition and Markets Authority (CMA).
The CMA’s probe is expected to be lengthy and Sainsbury’s does not anticipate the deal being concluded until the second half of 2019.
Some analysts have said the hiatus could have a distracting effect on both businesses — a charge Sainsbury’s dismissed on Wednesday.
Sainsbury’s retail like-for-like sales, excluding fuel, rose 0.2 percent in the 16 weeks to June 30, its fiscal first quarter. While that was ahead of analysts’ average forecast of a 0.1 percent fall it was markedly below growth of 0.9 percent in the previous quarter.
“The main explanation is if you...compare quarter four to quarter one, inflation in our business has dropped by about 1.5 percent and that’s as a direct result of investing in price,” Chief Executive Mike Coupe told reporters.
He pointed to price cuts totaling 150 million pounds on products such as rump steak, chicken fillets, king prawns and vegetables and said they had resulted in an improved sales volume trend.
He said while the quarter was one of significant change in Sainsbury’s store management structures, staff pay and the phasing of promotions, the Asda deal was not a factor.
Coupe noted Sainsbury’s had won the industry’s main award for service and availability for the sixth consecutive year.
“You don’t do that if you are distracted by outside forces,” he said. “Underlying we’re pleased with the performance. We’re focused on doing the day job.”
Chief Financial Officer Kevin O’Byrne estimated there were only about 15 people in the organisation working on the Asda deal currently.
According to the most recent industry data and company updates Sainsbury’s has seen the weakest trading among Britain’s big four grocers, which also includes fourth-ranked Morrisons.
The regulatory outcome is the main swing factor behind Sainsbury’s share price, which was up 2.2 percent at 1105 GMT.
Sainsbury’s and Asda have expressed confidence the CMA will not insist on mass store disposals as a condition of giving a green light but have declined to say how many would make the deal unattractive.
However, a source with knowledge of the situation told Reuters a figure “into the hundreds” would likely kill the deal.
Analysts at Jefferies, who have a “hold” rating on Sainsbury’s, see a 50 percent likelihood of the deal being blocked on competition concerns, most likely due to the impact on suppliers at national level. They see an equal likelihood of approval, but with around 12 percent of the combined sales base needing to be disposed of.
Analysts at UBS, who have a “buy” stance, have a base case scenario of a modest 28-54 store disposals to satisfy the regulator. However, that number rises to 132-161 stores if the CMA excludes discounters as competitors.
Sainsbury’s also said on Wednesday it has agreed a financing package of 3.5 billion pounds for the deal.
Prior to Wednesday’s update analysts were on average forecasting an underlying pretax profit for the 2018-19 year of 629 million pounds, up from 589 million pounds in 2017-18.
($1 = 0.7583 pounds)
Editing by Sarah Young/Keith Weir