Sainsbury's sales growth slows

(Adds sales numbers from last year and share price)

J Sainsbury PLC (SBRY.LN) said Wednesday that sales growth slowed in the first quarter as it cut prices on key products due to a competitive U.K. grocery market.

Britain's second-largest grocer by market share also said that it has agreed to a 3.50 billion pounds ($4.61 billion) financing package with its existing banks and new institutions for its proposed merger with Asda Group Ltd. Sainsbury's current line of credit will increase to GBP2 billion from GBP1.5 billion, providing further financial flexibility to the combined group.

On April 30, Walmart Inc. WMT, +0.52% said it will sell its U.K. business, Asda, to Sainsbury in a deal worth GBP7.30 billion. If the tie-up is approved by Britain's Competition & Market Authority it would create the largest grocer in the U.K.

For the 16 weeks to June 30, Sainsbury said like-for-like retail sales rose 0.2% compared with 2.3% growth in the same period a year earlier. Total retail sales increased 0.8% verses a 2.7% growth last year.

Grocery sales also slowed with the group recording growth of 0.5% in the first quarter, compared with 3% the previous year and Sainsbury said it has invested GBP150 million to lower prices.

The bright spot in Sainbsury's first quarter was general merchandise, which saw sales rise 1.7% against 1% last year. However, clothing sales grew 0.8%, below the 7.2% growth reported a year earlier.

Sainsbury is losing out to rivals in its core grocery business, according to Neil Wilson, chief market analyst at Markets.com, following data from Kantar Worldwide that said Sainsbury's sales and market share fell in the 12 weeks to June 17, in contrast with its peers. Sainsbury's sales fell 0.2%, while sales for Tesco PLC (TSCO.LN), Asda and Wm. Morrison Supermarkets PLC (MRW.LN) rose between 1.4% and 1.9% in the period. Meanwhile, sales at discount grocers Aldi increased 8.2% and grew 10% at Lidl.

Chief Executive Mike Coupe said general merchandise and clothing, including sales from the Argos catalogue business, "continue to outperform a very challenging market and we are well placed to further grow market share."

Mr Coupe said first-quarter headline numbers reflect price reductions the company made in key areas like fresh meat, fruit and vegetables since March. He said the market remains competitive, but the company has the right strategy in place and the Asda proposed merger will "create a dynamic new player in U.K. retail".

At 1030 GMT, Sainsbury shares were up 6.40 pence, or 2%, at 325 pence.