Sainsbury’s expects to incur costs of £500 million as a result of the impact of Covid-19 on its merchandise and clothing sales, despite increased volumes of food sales.

Sainsbury’s said it was working closely with suppliers to increase orders and to move products quickly through the supply chain and into stores.

Chief executive Mike Coupe said it has been an “extraordinary time” for the business and it would continue to work hard to provide food and other essential products to households across the UK and Ireland “who are adapting to a new way of living”.

The cost impact on the business of Covid-19 will also be offset by way of £450 million in business rates relief.

Mike Coupe, Chief Executive Officer, said: “The last few weeks have been an extraordinary time for our business. First and foremost, I want to say thank you to all of our colleagues. They have shown outstanding commitment and resilience over the past few weeks and I am in awe of their adaptability and the efforts they have made to continue to serve our customers. Across every part of the business, colleagues have played their part as we have done everything possible to feed the nation and to prioritise those who are least able to access food and other essential services. This is an unsettling time for everyone, but I am incredibly proud of the way the business has responded, continually adapting and responding to customer feedback. We will continue to work hard to provide food and other essential products to households across the UK and Ireland who are adapting to a new way of living.” 

The Covid-19 pandemic has had a significant impact on Sainsbury's business since early March. The retailer has had three clear priorities throughout: keeping customers and colleagues safe; helping to feed the nation and supporting communities and the most vulnerable in society. 

In a statement released on 30th April, the retailer said: "Our colleagues have played an incredible role and have really pulled together to serve our customers. In particular, our store colleagues, our distribution centre colleagues, our drivers and customer Careline teams are working on the frontline, ensuring that customers have good access to food and other essential items. Our central teams have supported them, working closely with suppliers to increase orders and to move products quickly through the supply chain and into stores. Where they are able, our central teams are supporting colleagues by working in our stores. We are incredibly proud of the role our colleagues have played and their unwavering dedication and effort in serving our customers and supporting our local communities during this unprecedented time. 

At this very early point in our financial year it is impossible to predict the full nature, extent and duration of the financial impact of COVID-19 over the course of the year and there is a wide range of potential profit outcomes, both short and medium term.

We have modelled a broad range of scenarios. Our base case assumes that lockdown restrictions will have eased by the end of our first quarter (end June), but that the business will continue to be disrupted until the end of the first half (mid-September). We also assume that consumer demand, particularly for general merchandise and clothing, will be impacted by weaker economic conditions thereafter. Sales assumptions are provided later in this statement. Under this scenario we would expect Group underlying profit before tax for the year to March 2021 to be broadly unchanged year on year. This includes a profit impact of over £500 million due to significant costs associated with protecting customers and colleagues, weaker fuel, general merchandise and clothing sales and lower financial services profitability, broadly offset by stronger grocery sales and approximately £450 million business rates relief. We have decided not to take up the government’s offer of furlough payments or delaying VAT payment.

There are many sensitivities that sit behind these assumptions, above and beyond the duration of different stages of lockdown and there is not necessarily a linear relationship between the duration of COVID-19 impact, costs incurred and sales impact. Hence we cannot be more certain of this base case scenario than any other. It is simply our best estimate on each of the assumptions at this stage. Sales, profit and cash flow could be additionally impacted in the event of further periods of lockdown; the cost of protecting colleagues could exceed current estimates; colleague absence and/or measures to protect colleagues and/or customers could reach levels that make it necessary to restrict the number of sites that we are able to keep open and/or services we are able to offer. Consumer spending across grocery, general merchandise and clothing and the profitability of our financial services business could additionally be more heavily impacted by the longer-term impact of COVID-19 on the UK economy than we have assumed. 

We have used more negative scenarios in stress-testing for financial viability purposes. Even with additional stress, we are confident that we have sufficient cash and committed funding in place to meet our obligations for the foreseeable future.  

However, given the wide range of potential profit and cash flow outcomes, the Board believes it is prudent to defer any dividend payment decisions until later in the financial year, when there will be improved visibility on the potential impact of COVID-19 on the business. 

Read the full update from Sainsbury's on the impact of Covid-19 and Preliminary Results for the 52 weeks to 7 March 2020.